Was the Oracle of Omaha Duped by Goldman, Just Like the Greeks?
Bloomberg reported yesterday that Berkshire Hathaway, as decided by Warren Buffett, entered into selling long-term equity option puts at the peak of the market.
Mr. Buffett was quoted in this article as being quite proud of that fact Berkshire Hathaway did not have any "counterparty credit risk" with this trade. That is correct, Mr. Buffett, however did Goldman, or whoever convinced Mr. Buffett to do this trade, explain although there is no credit risk, there is "unlimited" market risk.
The Derivative Project's knowledge of Mr. Buffett's trade is limited to what is in the Bloomberg article. Here is The Derivative Project's assessment of why Berkshire was duped:
Transaction Amount: Unknown
Transaction: Berkshire Hathaway sold equity puts
Maximum Gain: $4. 9 billion, the premium received up front
Maximum Losses: Unlimited (DOW to zero) or it was reported he sold the contracts at the market peak, Dow 14,000 and he would lose $9 billion if the market dropped 25 %.or DOW 3500.
When were trades executed: 2004 to 2008
When does an option trader normally sell Puts: in a flat or bull market
Description of a selling the Brk put: Berkshire Hathaway(Brk) sold puts, let's say on the DOW index, ETF DIA. Brk gave the option buyer the right to sell to Brk.the ETF DIA at DOW 14,000 in 5 years. Berkshire Hathaway receive $4.9 billion, the premium, for the buyer's right to sell the stock in the future. It is currently having to post collateral because the position is at a loss.
Why Was This Trade Ill-Advised?
From 2004 to 2008, the DOW was at an all-time high. Therefore, the chances of the bull market continuing, were smaller than the market going down.
Many economists and others were discussing the distortion in the equity markets from the real-estate bubble and the risks from unchecked counter party credit risk, that had allowed real estate prices to further balloon, from the synthetic cdos,s and the amount of consumer debt from second mortgages on inflated real estate.
1.) Most savvy investors were realizing the market had probably peaked and the downside was far greater than the upside.
2.) Berkshire Hathaway's shareholder's equity is approximately $151 billion. If the market does decline 25%, reasonable in this potentially deflationary environment and stalled economic period, BRK could lose over 9% of its shareholder's equity. The maximum gain on this trade is 2% of shareholder's equity. Berkshire Hathaway is currently recognizing a liability on this trade of about $7 billion.
3) If Berkshire Hathaway, whose corporate mission is not trading profits,it is engaging in a clear case of mission creep. There is nothing wrong with the short-term speculative move, where the downside is limited, but this is a clear case where the market risk is too great and the $4.9 billion could have been better invested in technology, research, small businesses....strategies to build sustainable value.
4) There is a difference between investing and speculating. This was pure speculation.
Now We Know Why Nebraska's Senator Was Lobbying Hard to Limit Collateral Calls
Many will recall Nebraska's Senator was fiercely lobbying the Senate to change the amount of collateral required in the OTC derivative market. These additional collateral calls will hurt Berkshire shareholders and take money away from other income producing and grwoth opportunities.
However, Congress relented and eased the restraints on collateral calls because of the "end user" out-cry. These stiff collateral requirements would impact business expansion, they would cost the end-user too much and therefore limit economic growth.
The ill-advised, writing of put options in a bear market, is going to do more harm to a sustainable economic recovery than increased collateral calls on speculative trades.
As Salomon Brothers' equity analyst, Thomas Hanley, said when the CEO of U.S.Bank specualting with government bonds in a rising interest rate environment, "sell USB, they are are no longer acting in the community's best interest." Read The Derivative Project's Simple Story on our Home Page about equity analysts and the community's best interest.
The U.S. equity markets need the equity analysts that are digging and studying the corporate derivative trades and are not afraid to recommend a sell on BRK, "they are no longer acting in the community's best interest or shareholder's interests."
July 27, 2010 (with update on July 29, 2010)
A Primer on the OTC Interbank Market for the Department of Justice
Please browse Andrew Ross Sorkin's New York Times DealBook article on Goldman's counter party credit risk and Mr. Sorkin's "summary" of why AIG and Goldman were bailed out by the taxpayer.
Mr. Sorkin is reinforcing for the American public, on behalf of Goldman, that the money given to Goldman was to "stabilize" the financial system. To quote Mr. Sorkin:
"A.I.G.’s rescue has repeatedly been described as a “backdoor bailout” of Wall Street. In fact, it was a front door bailout aimed at stabilizing the entire financial system."
The bailout of AIG and Goldman was not necessary to stabilize the financial system. There were alternatives. The Federal Reserve and the Office of the Comptroller of the Currency have the authority to unwind fraudulent financial contracts in an emergency to prevent systemic risk. It still can be done now. That would save the American taxpayer $180 billion dollars that would go along way to funding education cuts or shoring up Social Security or to support SBA(small business administration) lending or cutting our deficits.
We still have not heard from the Financial Crisis Inquiry Commission(FCIC) on their findings. The Derivative Project reminds the FCIC that Goldman is a very sophisticated "risk manager." Goldman was fully aware of how much counter party credit risk was acceptable to have outstanding with AIG. They had access to AIG's financial statements and senior management. Goldman knows as a sophisticated risk manager, one always plans for significant percentage increases and decreases in underlying assets and there are always unpredictable "acts of God" that one must prepare for in their risk positions. Prudence.
Goldman's management made the decision to enter into financial contracts with AIG, knowing full well AIG did not have the capacity to make good on these contracts if the underlying assets declined say 10, 15 or 25%. That is the essence of fraud. The OCC has the power to unwind contracts that have been entered into fraudulently.
The American taxpayer is owed an explanation on why these financial contracts, entered into by a "sophisticated" risk manager were not fraudulent. Please, the "stupidity defense" used with AIG cannot be used with Goldman.
July 26, 2010
Is Andrew Ross Sorkin of the New York Times on Contract with Goldman?
Mr. Sorkin, what is the essence of an "over-the-counter" derivative market? The major players to this market did not need collateral because they self-policied and analyzed the credits of their counter -parties, thus ensuring an efficient market, that did not require daily mark to market.
Financial contracts entered into in the traditional "interbank market" or "OTC derivative market" were based on trust and the self-policing of the credit-worthiness of the counter parties. If Goldman believed AIG was going to fail, it had a fiduciary duty to the OTC or interbank market to alert the other counter parties and in this case the Federal Reserve, Office of the Comptroller of the Currency to prevent a "collapse". After all, Goldman touts its raison d'etre as the premier "risk manager."
Goldman breached its fiduciary duty with all the counter parties in the OTC credit default swap market, it breached its fiduciary duty in the Abacus case, and it breached its fiduciary duty in its swap sales to Greece. In sum Goldman perpetuated the "ponzi scheme" by purchasing credit default swap contracts from Lehman on AIG.
Goldman Sachs abused the principals of an "OTC' market. They executed far too excessive positions with a hedge fund (Blue Mountain) who did not have any privately or publicly accessible financial statement information. But, most egregiously, for an OTC market, when Goldman realized they had "pushed" AIG too far on worthless CDS trades, they went long protection on AIG contracts with Lehman, who also was in no credit position to enter into these contracts.
Mr. Sorkin, you are "sullying" the image of an icon, the New York Times. Get the facts on the essence of what an OTC market is, before you are the PR voice for Goldman Sachs.
July 24, 2010
Is U. S. Democracy Dead?
Reuters reported yesterday that Goldman, as pressured by the Financial Crisis Inquiry Commission(FCIC), revealed that Goldman was fully aware that they had pressured AIG beyond their logical credit capacity and AIG would succumb to bankruptcy due to the over-extension of counter party credit risk on credit default swaps.
How has Goldman documented they were fully aware
AIG's credit default swap contracts were but a "ponzi scheme"? Goldman enlisted other counter parties to insure them ( as revealed to the FCIC according to the Reuters link above) and pay them when AIG
could no longer make good on the fraudulent AIG credit default swap contracts with Goldman. The Reuters article cited above lists the counter parties that agreed to
pay Goldman when AIG failed. This is "interconnectedness."
The article quotes the reason for the taxpayer
bailouts of Goldman and other counter parties:
"The interconnectedness of major banks
was a important factor in the spread of the financial crisis, and led the U.S.
Congress in 2008 to authorize a $700-billion bailout package for the financial
As a knowledgable observer, such as the
Department of Justice, can ascertain, this "interconnectedness" was
simply a Ponzi scheme that could have and should have been unwound in 2008 by
then New York Federal Reserve Geithner and Treasury Secretary Paulson.
The appearance of conflict of interest is conflict of interest.
Why is Democracy Dead?
Beginning in July 2008, The Derivative
Project asked our Senator, Senator Klobuchar, to investigate this Ponzi scheme.
We sent letters, emails, alerted the local press, MinnPost, but we never
got a response. MinnPost didn't ask any questions. When it comes to a
Constituent's question about Wall Street it is abundantly apparent a
Minnesota Constituent is not worthy of a response.
Here is an excerpt of a letter sent to
Senator Klobuchar in 2008, prior to her voting on TARP. The Derivative
Project still encourages Senator Klobuchar to take her role seriously on the Senate Judiciary Committee and work for an answer on why these credit
default swap contracts could not be unwound, refunding the American taxpayer
Excerpt from The Derivative Project letter to Senator Klobuchar September 2008...
"I sent you (Senator Klobuchar) and Ashwin Madia’s (MN DFL 3rd Congressional District Candidate) campaign manager and Economist
Jeremy Siegel, with a copy to MinnPost, asking you and Economist Siegel
to investigate the conflict of interest of then Secretary Paulson in making
decisions on the AIG bailout due to Goldman Sach’s derivative exposures, as
reported by the New York Times, to AIG.
Here is the email I sent to you and Professor Siegel in
September, requesting you obtain more information and transparency before
voting on the TARP.
spirit of full-disclosure, is there a conflict of interest with Secretary
Paulsen's previous relationship with Goldman Sachs and Goldman Sach's counter
party risk in the credit-default swap market with AIG. Shouldn't this
have been disclosed?
Does it make
sense for the Federal Reserve to supervise the disposition of the
mortgage-backed securities to determine the size of the financial losses, while
at the same time forcing the counter-parties to the credit default swaps,
globally, to come to terms with a plan for unwinding these meaningless
"swaps"? Of course this is unprecedented, but the American
people want creative, unprecedented resolution to this debacle. Don't you
think more transparency is needed on the relationships between the
mortgage-back securities and swap market, before Congress acts on this bailout
“We all agree we must do something. Put controls on
the off-balance transactions now. You can't put good money after bad.
Take time to come up with a thoughtful strategy with actual
numbers and details for the public with more transparency. Our economy is
going to be hurt, because it was a "ponzi" scheme and there is no
These are not valid assets. Separate the real assets
from the synthetic and "toxic". Work-out a plan between
counterparties on the CDS that is separate from the mortgage-backed assets. "
It is now clear, the system would not
have collapsed, It was an idle threat by then Secretary Paulson to get
the billions of dollars in collateral calls from AIG to Goldman. There were
alternatives that could have been explored in 2008 and these alternatives can
still be explored now. It is not too late, Senator Klobuchar, to show
Minnesotans that democracy is not dead.
In addition, on June 1, 2010, the Department of Justice sent this response to The Derivative Project:
Of course the American people know the difference between the SEC investigation of AIG/General RE and the need for the DOJ to investigate the AIG/Goldman counter party credit risk ponszi scheme. Apparently our DOJ does not.
If the U.S. Judiciary is complicit with Goldman, if the Federal Reserve is silent, if Congress is complicit, if the Executive Branch is complicit, if mainstream media is silent, what is next for U.S. democracy?
The Derivative Project will keep our readers
posted on any response from Senator Klobuchar.
July 11, 2010
Why Has The Derivative Project Been Silent?
It has been close to one month since The Derivative Project has updated our readers. You all know why. The Derivative Project decided to sit back and observe the shenanigans in Washington, by Congress, over defining and passing the rules to change financial reform to protect Americans from a repeat of the collapse of the U.S. economy from the "financial crisis" of 2007.
It has been painful to observe, our Congress bending to the wishes of a few on Wall Street. The Derivative Project knew the reality; there were no words that could compete against the big money - interests of Wall Street.
Once again, MIT Economist, Simon Johnson, has put forward the most thoughtful and reliable analysis, at his blog, Baseline Scenario. Read Simon Johnson's entry on June 21, "Dead on Arrival: Financial Reform Fails.
However, Simon Johnson gives a glimmer of hope with the Kanjorski Amendment on July 9th. Here is a excerpt:
"Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.
The Federal Reserve is in the hot seat on this issue – and it needs 7 out of the 10 members of the new systemic risk council to agree to any action. But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.
And congressional committees can call upon the responsible people to explain how they determine whether a megabank is or is not dangerous. What are the risk metrics they use? To what extent do they take on board outside opinions? How much do they consult with the bank itself?
This also creates important space for critics. There are many people – outside of the big banks – working on developing ways of assessing system risk. Again, congressional hearings can raise the prominence and credibility of this work. The question will be: If the regulators are not taking these perspectives into account, why not?"
Senator Feingold Will Be The Sole Democrat to Vote "No" This Week - A Ray of Hope
Senator Feingold (D-WI) is the sole Democratic Senator that will vote "no" for this financial reform bill. This is clearly a bill that mocks the integrity of our Congressional system. It is critical that Senator Feingold retain this stance. Here is the onlineMilwaukee Sentinel that quotes Senator Feingold on why he will vote "no":
"It doesn't do the job, and I'm not going to be part of basically defrauding the American people into thinking it does," said Feingold in an interview that underscored his pointed differences with his own party on a reform package intended to prevent a repeat of the catastrophic financial meltdown of 2008.
In the interview, Feingold leveled the same charge against some of the bill's supporters.
"The most progressive elements know this is a bad bill," Feingold said. He described some of the bill's progressive backers as "pseudo-progressives," late-comers to the issue or groups financed by powerful interests who want to "paper over the real problems in order to say they've solved it. They are not trying to get at the core issues."
Despite some good things in the bill, Feingold said, it fails to fix the most important problems: Financial institutions that are "too big to fail" and the breakdown of old boundaries between different entities such as commercial banks and investment houses. The third-term senator is not alone in those criticisms; a number of analysts have made similar arguments."
The Derivative Project salutes the Appleseed Mutual Fund for creating the change, a "ripple of hope"
As many of The Derivative Project readers know, we grew up in a politically charged Vietnam era, when the late political science Professor, Howard Zinn, of Boston University, taught us how to effect change.
In a democracy change does not come from those in power, it comes from those coming together, prodding and pushing those in power. The Derivative Project salutes the Appleseed Fund for taking the first step. On July 9th, the Appleseed Mutual Fund announced they would no longer invest in the "too big too fail banks, or those that are the top five U.S. derivative trading banks according to the 2010 first quarter OCC report available on The Derivative Project home page.
Here is the Appleseed's rationale, from their July 9th press release:
"Adam Strauss, one of the Fund's co-portfolio managers, explained the change: "The cost of bailing out Wall Street since 2008 is over $3 trillion, or more than $20,000 per taxpayer, and that cost is increasing daily. The financial burden of that bailout will be felt for a generation and will be paid by children, some not yet born. Instead of an industry structure where the largest banks are serving the economy by lending capital, U.S. policies and regulations favor the largest banks, which have proven themselves incapable of fiscal rectitude.
"The banking system's current industry incentives are misaligned since employees keep a disproportionate amount of the profits while taxpayers subsidize the losses; this unhealthy imbalance is unsustainable and encourages excessive financial speculation. In the financial reform bill which recently passed the House of Representatives, Congress failed to break up or limit the size and scope of the largest banks that have destabilized the financial system and destroyed so much value over the past five years. We were disappointed lawmakers did not stand up to the banking lobby in order to avoid future bailouts. Without meaningful reform, we fear the next crisis will be larger and more devastating than the last.
"Given the failure of regulators to prevent the previous credit crisis and the subsequent failure of legislators to break up the massive and very much interconnected banks that helped to create the crisis, it is incumbent on depositors and investors to vote with their wallets."
The Derivative Project Urges You to Make the Change to Restore Our Economy
Congress has failed us. The future of our economy is in your hands. Contact your employer and ask them for an investment option for your 401K or 403B comparable to that of the Appleseed Fund (APPLX) or the Appleseed Fund that makes a conscious decision to shun the top five derivative trading banks that put the future of our society and our economy at risk for their own personal gain.
It takes the courage of one to effect the change we require. Email us at email@example.com your individual steps to restore our society to one that is a world leader and one that we can once again take pride in.
Check back soon to learn of the progress.
June 13, 2010
Average American’s Derivatives Primer to the
2010 Financial Reform Bill
What Should the Final
Derivatives Bill Look Like or Why Blanche Lincoln Won Her Primary Against the
The June 10,
2010 report by the Congressional Oversight Panel on “The AIG Rescue, Its Impact
on the Markets and The Government’s Exit Strategy” provides the rationale for
and the roadmap for financial reform.Here are the three crucial amendments that must be included in the
financial reform bill to be constructed by a subcommittee of House and Senate
1.Glass Steagall must be reinstated
(Proposed by Senator Tom Harkin, D- Iowa)
2.Commercial bank proprietary trading on
all derivatives, swaps, futures, foreign exchange forwards, etc must move to a
separately capitalized entity, outside of a commercial bank (Lincoln Amendment),
with the Cantwell amendment for the interest rate swap loophole
3.Naked credit default swaps should be
banned, but if they are not, all credit default swaps must trade on a regulated
exchange, regulated by the CFTC, with specified collateral positions, with no
it happen, without exception.Short of that, democracy is dead.We don’t care about what kind of side deals you have to make it
happen.Just get it done.
Congressional Oversight Panel outlines the necessity for a bi-partisan vote on
the above regulatory changes.Americans left and right now know this bailout was unnecessary. The
financial system would not have collapsed.The American public was snookered out of billions of dollars
that were funneled to the bonus pool of a few executives, under the guise of
critical contractual collateral call payments of credit default swap contracts.As the Congressional Oversight Panel on
the AIG rescue pointed out, “the rescue” was laden with conflict of interests.
has been called a chameleon, and Scarlett O’Hara in her move to embrace the
strictest derivative reform, which has been mocked and initially touted as the
most significant long shot by the powerful Wall Street lobby.President Obama, FDIC Chair Sheila Bair
and Volker oppose it.However, on
June 10, several Federal Reserve Presidents endorsed Senator Lincoln’s
amendment.Here is the link to
that story at The Huffington Post:
Senator Lincoln cite her strong support of big oil and cite it as an “outrageous
move to push for the most strict derivatives reform as chair of the Senate
Agricultural Committee, as clear evidence of being a straight up chameleon.”
Why Senator Lincoln Is Not A Chameleon
As head of the
Senate Agriculture Committee, Senator Lincoln knows what a derivative is and
the value they bring to farmers, importers, exporters and multinational
Cantwell, D-Washington, summarized it best:
"As a daughter of a farmer, she knows the difference
between farmers legitimately hedging and Wall Street speculators cooking up
The Wall Street lobby seeks
to retain the status quo in maintaining an American GDP that is over 20%
dependent on speculative derivatives trading to the detriment of the future of
the U. S. economy overall.
·Glass Steagall had operated successfully for over
forty years, which was implemented by Congress to control speculation by
commercial banks in the 1930’s
·Commercial banks operated in the best interests of
the community, using a small, ($2-3 billion) controlled over-the-counter
derivative markets, to hedge end-users foreign currency exposures and
independently monitored counter-party credit risk, while at the same time doing
manageable proprietary trades based on their clients’ request for hedges.
Senator Lincoln’s amendment is
mandatory for any financial reform for four reasons:
(1)Glass Steagall was repealed in 1999, once again
allowing the rampant speculation that was part of the cause of the Great
Depression, to take root from 1999 to 2008 and caused the “second great
depression’ in 2008.
(2)Commercial banks and investment banks put their own
greed a head of common sense and managing counter party credit risk, allowing
for systemic risk to the entire financial system
(3)Both commercial banks and investment banks were
allowed to underwrite securities that exacerbated the systemic risk
(4)To unwind the mess, neither the Federal Reserve,
the SEC, nor Congress represented
the interests of the American taxpayer.The Department of Justice has refused (see blog entry, The Derivative Project Blog entry June 12) (http://www.thederivativeproject.com/Blog.html) to
investigate the AIG fraudulent “bailout” and has made a mockery of the request
to do so, by the average American taxpayer.
Therefore, the voters of Arkansas
were easily able to understand what Senator Lincoln stood for:a return to the simplicity of the past,
commercial banks act as commercial banks and speculative activities occur in
full transparency on regulated exchanges or through central clearinghouses,
with sufficient collateral calls.To do otherwise, is to damage the belief in our fundamental democratic
The blog, Firedoglake, recently
mocked the thought that the average American understands financial reform and
that it influenced the win by Senator Lincoln.
appears the populist provision resonated with voters.That’s hilarious.Does anyone really think that Blanche Lincoln’s nomination rested on a
section of a bill she wrote which nobody outside of financial experts can truly
describe…go find me 10 Arkansans who can define ‘swaps trading desks” for me.
We have found those 10 Arkansans
and they check in with The Derivative Project daily.In sum, every American understands common sense and it
doesn’t take a financial expert to describe what needs to be done.
Volcker Amendment Does Not Go Far Enough
The Volcker amendment does not go
far enough as Joseph Stigliz, economist and Professor at Columbia Business
School, has stated, “it is open to regulatory discretion.”We have been burned once, as the
Congressional Oversight panel has shown by the AIG investigation.Regulators cannot be trusted.Americans refuse to fund the exorbitant
costs to monitor over-the-counter derivatives and baby-sit the side bets of the
five major swap dealer banks.
Reinstate Glass-Steagall, nothing
more, and nothing less.
Trading Must be Excluded from Traditional Commercial Banking Operations
The only rationale for
derivatives is to hedge an underlying asset position that poses risk and
uncertainty. Congress must create the marketplace for these end user hedges in
an entity comparable to the old-fashioned grain-exchange, nothing more, nothing
less. For example, when foreign exchange options evolved in the mid-eighties,
they were introduced both on the Philly exchange and in the OTC derivative
markets.The organized exchanges
make it a touch more difficult to customize trades, but the alternatives for keeping
risks of the OTC market out weigh these small limitations. Bring buyers and
sellers together, with transparency and collateral for both long and short
The over-the-counter derivative
markets must be eliminated.The
trust is gone and there are no regulators powerful enough to stand-up to the
Wall Street lobbying and on-going sphere of influence Wall Street exhibits in their
employment patterns with Washington.
End Users Will Be Better Off?
End users account for about 10 %
of the major banks derivative trades based on Office of the Comptroller of the
Currency reports. Six major swap dealer banks, which present a very small group
of market makers, do 96% of all derivative trades and there is a lack of
transparency in price.
Through the design of a
marketplace that includes multiple parties, with price transparency, the end
user will have a more efficient market.It will be different, it will be a significant change, but it will be
more efficient.The end-user must
accept that the major derivative banks were the cause of the destruction of the
once efficient OTC markets and work with Congress to design the successor for a
successful end-user derivative marketplace.
The End-User Arguments Against This
Reform Are Not Based on Fact
The Derivative Project responds to Congressman
Peterson: It is equally probable a
marketplace with more participants and price transparency will lower end user
costs.The American taxpayer will
not be on the hook for the costs to monitor potential systemic risks for the
proposed derivative trading structure in the House Bill.
2. “Many business groups worry the bill will drive up
companies’ costs for managing risks and
“could hinder job creation for
manufacturing and other non-financial companies that had
nothing to do with the
Project responds to these business groups, risks can be easily managed on
exchanges.As you are well aware,
the well-known economic tenet is competition leads to more efficient, fair
pricing and would have absolutely no impact on job creation.
Consider a Compromise Position To Satisfy The End User, if You are At a
One potentially compromise position would be to:
1.Re-institute Glass Steagall
2.Implement the Lincoln Amendment, in particular Section 716
3.For hedging end-user foreign exchange positions for
multinationals, importers and exporters, as a vehicle to encourage exports,
have the CFTC/SEC manage and regulate a small OTC foreign exchange market where
they would monitor and approve eligible counterparties, that was comparable to
the 1980’s “inter-bank” market which would allow end-user FX spot, forward and
swap contract needs.This market
would be on-balance sheet, in a separate capitalized entity, as proposed in the
Lincoln Amendment and it would only exist for foreign exchange hedging by
Congress failed the American
people by not asking any questions of Mr. Geithner and Secretary Paulson,
before TARP payments were authorized and before AIG payments were
authorized.The Derivative Project
beseeched the sole Minnesota Senator to just ask a few questions before casting
a vote, on TARP or on the appointment of Secretary Geithner. The Minnesota
Senator refused to do so.This was
not a democracy. Congress was seduced by Wall Street and afraid to exercise
independent thought or afraid to risk the lucrative campaign funding from Wall
Republicans and Democrats up for
re-election in November will be judged by their ability to restore the
fundamental principles of our democracy, by saying no to capture by Wall
Street. Republicans and Democrats that still don’t understand how they failed
the American people, by not asking any questions before voting on TARP should
be asked to resign or apologize.Admit their mistake, so it never reoccurs. Our future depends on it.
Blanche Lincoln won last week
because she understood this is as important to voters, as health care, big oil
and the environment. She knows American's reputation hs been damaged worldwide and seeks a fiduciary duty for swaps, to end the embarassing lawsuits from Italy and Greece against our banks.
Congress must make the critical financial reforms, steps
to restore faith in our political and economic system.
June 12, 2010
---Is this Fraud or Incompetence? Who has Informed the Department of Justice on What a Credit Default Swap Is? Goldman? Either way, Congress, Please Take Action
As The Derivative Project readers know, on April 6, 2010,(see Blog entry on that date) The Derivative Project wrote a letter to Attorney General Eric Holder requesting an investigation by the Department of Justice into the fraudulent AIG credit default swap contracts that the U.S. taxpayer was required to fund. By definition, a financial contract that one party enters into, with knowledge there is not sufficient capital to make good on these contracts, is fraud. It is no different than the Bernie Madoff Ponzi Scheme, there was not sufficient capital backing the contracts or agreements.
Therefore, it was fraud on the part of Goldman Sachs and it was fraud on the part of AIG to enter into these contracts. It was public as early as April 2007 that there was not sufficient counter party credit risk tracking and collateral to back up these contracts.
April 6, 2010 The Derivative Project Contacted the Department of Justice
The initial call by The Derivative Project about this issue to the Department of Justice in April 2010, was referred to the "duty attorney." who was familiar with this case. He said "in the case of AIG with the credit default swap contracts, it was not fraud, it was "stupidity."
Congress, the American people will not accept "the stupidity defense" with Harvard economist Martin Feldstein on the Board of AIG at the point in time the millions of CDS contracts were executed by AIG.
June 1, 2010 The Department of Justice Sends a Letter to The Derivative Project
The Department of Justice, with this response to The Derivative Project, exhibits their attitude to the American people:
Wall Street can do whatever it wants to do, we don't care and we will not investigate or enforce the laws
We are free to insult the intelligence of the average American, because they obviously don't know the difference between 'accounting fraud' and 'contract fraud' and do not know the difference between a derivative and insurance.
Did the Department of Justice really believe that the SEC investigation into the AIG General RE accounting fraud would be sufficient to let AIG and Goldman off the hook for their credit default swap contract fraud? Or that the General RE investigation was an investigation into the misuse of credit default swap contracts?
Did the Department of Justice really believe The Derivative Project would accept as the DOJ stated in their letter "I am enclosing a press release from the U.S. Securities and Exchange Commission regarding an investigation into this matter."-that this was an investigation into the misuse of credit default swaps, as the DOJ letter stated?
Congress, it is imperative you take action and restore the average American's faith in our democracy. Congress, perhaps it is time you insisted the Department of Justice hire immediately some derivative professionals, outside of Wall Street, who understand the difference between "insurance" and a financial contract with a derivative. Who has been advising the DOJ on what a credit default swap contract is? AIG and Goldman?
The Derivative Project will be sending a request to its two Minnesota Senators, Senator Klobuchar and Senator Franken, who both are members of the Senate Judiciary Committee, asking them to seek a response from the Department of Justice on why they think accounting fraud is contract fraud and why the DOJ thinks the SEC investigation into AIG/General RE is the same as the credit default swap debacle. We will request that they launch an investigation into whether or not the credit default swap contracts executed between AIG and Goldman were "fraudulent" contracts.
We will keep you posted on the Minnesota Senators' response.
June 8, 2010
Senator Lincoln Wins Arkansas Primary: Take Heed Incumbents Up in November, Voters Have Ennui of Those Bowing To Wall Street
Congratulations to Senator Lincoln for her win in today's Arkansas Democratic primary. Senator Lincoln, as head of the Senate Agricultural Committee, helped implement a critical amendment on separating out derivatives from the core business of commercial banking, a key amendment to the Senate Financial Reform bill. Few predicted it would survive.
Voters took notice. Incumbents who pay attention to standing up against powerful Wall Street lobbyists will have success in November, others who can't comprehend the critical need to return our economy to one of solid revenue sources, vs speculative income, won't survive. Others, who can't comprehend and take a stand on the oil spills and senseless AIG bailouts resulting from fraudulent, unethical corporate behavior will not survive in November.
June 8, 2010
The Smoking Gun? FCIC is Finally Going Back With Subpoenas for Goldman's "Fraud" with AIG
As The Derivative Project readers are aware, since February 2009, first in written testimony to the House Bill, the Derivatives Transparency Act of 2009, we have called on Congress, the Department of Justice and the Executive Branch to investigate the most basic cause of the billions of dollars flowing from the U.S. Taypayer to AIG and forwarded to Goldman Sachs.
Here are the five questions FCIC must probe with the Goldman Sachs executives:
What risk management systems did Goldman utilize in managing and monitoring counter-party credit risk from 2006 to Fall 2008 with AIG?
Did you specifically ask AIG what notional amount of credit default swap contracts they had outstanding and the financial capability behind these contracts if the market were to move up or down 10%? If not, why not?
What was your credit analysts' balance sheet and income statement analysis of AIG and their accompanying off-balance sheet exposures in Spring 2007?
2. What is the difference between entering into a financial contract and writing
3. Is it fraud to enter into a contract when you are aware the other party to the
contract does not have the financial backing to fulfill this contract? If not, why not?
4. If Floyd Norris of the New York Times reported in April 2007 about the amount of
un-managed counter party credit risk in credit default swap contracts, what
procedures did Goldman take to mitigate and manage this risk, for both Goldman's
portfolio and the domino effect of systemic risk when these un-managed
positions started to collapse for the entire system?
Did you have any conversations in Fall 2007 with Treasury Secretary Paulson about the systemic risk that un- managed counter party credit risk could present to the U.S. financial system? It was widely reported by mainstream media. If not, why not? Would it not have been prudent to arrange for a systematic unwinding of these positions? Would that have mitigated the uncertainty and impact on the "financial crisis" on equity markets and bond markets?
5. Do you think Goldman should reimburse the U.S. Taxpayer for the collateral call
payments on the AIG credit default swap contracts, since these payments were a
result of Goldman's inability to manage the counter party credit risk with AIG? If
not, why not? Can you provide a rationale that it was not incumbent upon Goldman
Sachs to only enter into financial contracts with firms that they had done their due
June 2, 2010 3:27 PM EST
Why is Mr. Buffett Citing the American Public as the Cause of the Financial Crisis?
On more than four occasions, Mr. Buffett responded to questions about a flawed ratings agency model for a bubble in housing prices, Mr. Buffett cited the American public as the problem. Here is an excerpt from CNBC's interview with Mr. Buffett this morning:
"BECKY: But when you have ratings agencies that go from an A or— a AA rating overnight to a D, I mean, that shows that there's a huge problem with the— the system that's been set up—
BUFFETT: There was a huge flaw in the model. That w— basically, the American public had a model that— where they didn't think house prices could— could crash. And— and a very, very, very big bubble, probably the biggest I've ever seen, popped. And when it popped— A's became D's and so on. That—"
June 2, 2010 1:48 EST
Mr. Buffett Told FCIC That the Large Derivative Positions of the Major Swap Dealer Banks Cannot be Managed by Any Regulatory Authority
That Statement Supports Senator Lincoln's Amendment and Simon Johnson's Thesis That Large Banks Must be Broken Up
Ms. Born, FCIC: "Mr. Buffett, In light of the problems you had with General Re derivative positions, how can major derivative dealers successfully manage their companies $78.6 trillion in notional amount, which JP Morgan has for example, - can this successfully be managed by human beings?
Mr. Buffett: No, it is hard to successfully come up with a regulatory entity to manage these positions.
Ms. Born: Mr. Buffet, do you still think derivatives are instruments of mass destruction?
Mr. Buffett: Yes
June 2, 2010
Does Berkshire Lack Fundamental Understanding of What a Derivative Contract Is?
--Berkshire Sells Naked Credit Default Swaps, but this is different, we are not buying "instruments of mass destruction, "because we are selling insurance"
Follow this line of FCIC questioning:
FCIC: "Mr. Buffett. sharply rising prices are a sign, of the bubble. Didn't you see the problem?"
No substantive response.
FCIC: "Mr. Buffett, why did you sell your Freddie Mac stock?"
Mr. Buffett: "They bought some bonds that weren't related to housing."
FCIC: "Mr. Buffett, CDS are instruments of mass destruction, you are famous for this quote.
Mr. Buffett: "Derivatives are instruments of mass destruction, they pose system wide problems. We have never bought a credit default swap.
We sell credit default swaps. We sell insurance. We sell credit insurance."
FCIC: Like AIG?
Mr. Buffett: "No, it is different what we do."
June 2, 2010
Live Blogging FCIC - A Lot of Questions and No Substantive Responses
Mr. Angelides asked Mr. McDaniel, CEO Moody's about what Moodys did to adjust the housing model, once Mr. Zander at Moodys.com predicted a housing crash in 2006.
Mr. McDanielwas not given an opportunity to respond. He was interrupted by additional questions, repeatedly, before responding to the questions asked.
Vice Chair, FCIC asked Mr. Buffett,"You have a reputation as the risk manager, why did we as a society missed so many signs?
Mr. Buffett responded. "Initially, the premise made a lot of sense. A home is a sound investment. You are going to stretch to buy a house. If the guy lies about his income it doesn't matter, because the price is going to rise. It was like a narcotic.
Mr. Angelides, then asked Mr. Buffett shouldn't rating agencies police this narcotic, is that not their role?
Who is responsible?"
Mr. Buffett did not respond.
June 2, 2010
Live Blogging - FCIC Testimony by Mr. Buffett
Mr. Angelides, Chair of FCIC, asked Mr. Buffett if the ratings model should change, such as adopt the Franken Amendment.
Mr. Buffett evaded the question and did not offer a substantive answer about alternatives for a business model, at Moodys, that clearly failed.
Mr. Buffett testified that no one saw the significant collapse in the housing market and when asked if the ratings caused the crisis, Mr. Buffett's response, "who would have had given different ratings? Mr. Buffett in his testimony and in his CNBC interview, just prior to his testimony, repeatedly said, "The American public had the model, they didn't think housing prices could fall."
Mr. Angelides asked Mr. Buffett, "Was it a problem of a failed model or lack of due diligence?
Mr. Buffett again responded, it was a huge bubble, no one saw it. "This was a nation wide bubble."
June 1, 2010
Beware of The Merkel Short (or lack thereof) and "There is Something About a Lady"
Thank you Michael Lewis, author of The Big Short for explaining to Wall Street executives why The Derivative Project has nothing more to say, other than thank goodness for Angela Merkel, Blanche Lincoln and Elizabeth Warren. "There is something about a lady." We are routing for you.
The Derivative Project will be blogging live from the Financial Crisis Inquiry Commission's subpoena of Mr. Buffett and FCIC's questioning of his sale of some of Berkshire's Moody holdings, right after Moodys was issued a Wells Notice by the SEC.
Unlimited Counter Party Credit Risk
The Derivative Project has asked FCIC to explain why unlimited counterparty credit risk by AIG and Goldman is not fraud. When members of The Derivative Project went through commercial bank training we were explicitly told it was fraud.
We hope the FCIC asks Moodys how they missed that AIG wrote financial contracts, credit default swap contracts, without the financial backing to fulfill these contracts. This is by definition fraud. It was self-evident by looking at AIG's 2007 Balance Sheet and notes. The Department of Justice did not respond to The Derivative Project, nor has FCIC, requests for an explanation.
It is just too basic and embarrassing, as Congressman Collin Peterson told The Derivative Project, that it was basic credit risk that "brought the system down". Any financial analyst could see that and they did. Secretary Paulson and Mr. Geithner just had too many close friends to blow the whistle.
Come on, FCIC, let's give one to the little guy. Please, let's plug the hole and stop the flow of slick snake oil.
May 26, 2010
There is Nothing More To Say, It is Time for the Corporate Resolution
Baseline Scenariosums up the state of financial reform today. Nothing fundamental will pass to protect the American consumer and the fabric of our society. In sum, if Senator Lincoln's core reforms for separating out commercial banks' derivatives trading and to institute a fiduciary duty on derivative advice are stripped out of the bill, nothing has been accomplished by this financial reform bill.
It will be back to the ground rules of The Derivative Project. We will be working with corporations, non-profits, and municipalities to pass resolutions to prohibit business with the top five swap dealer banks.
If Congress, Congressmen Frank and Dodd, choose to side with Wall Street, which is anticipated, they are other avenues to effect change.
Click the Resolutions tab and take action today.
May 23, 2010
What Caused the Collapse in Europe and the Financial Crisis in the U.S.?
Simon Johnson, Baseline Scenario, has a well thought-out summary of the causes of Greece's collapse and the economic outlook. Here is his blog post today.
"Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures."
The DOJ is Setting a Dangerous Precedent with No Charges Against AIG:
---The "Stupidity Defense"
As The Derivative Project readers know on April 5 we sent a letter to Mr. Holder (see Blog entry on that date) requesting a response as to why AIG's execution of credit default swap contracts, beyond their ability to make good on these contracts, was not fraud.
The Derivative Project had contacted the Department of Justice in early April once the Wall Street Journal had reported in early April that charges against AIG were not likely.
The "duty attorney" on call who responded to The Derivative Project stated, "what AIG did was stupidity, stupidity is not fraud."
Hm,...if one is talked into taking out a mortgage beyond one's capacity to pay back that mortgage, isn't that individual still liable for that debt. Is stupidity a defense? Of course it is not, and that individual will be prosecuted for failing to make good on that debt.
Goldman knows how to manage counter-party credit risk, as did AIG. The DOJ says they just didn't know it was dangerous..."the stupidity defense."
Then why were we at The Derivative Project trained to analyze counter-party credit risk on derivatives, hour after hour, pouring over balance sheets and income statements? Is credit risk something executives of AIG weren't trained in, is credit risk something Goldman executives were not trained in? Apparently, the executives have convinced the DOJ this was a new risk and all of this financial collapse, they are sorry for. They were just naive and "stupid."
Therefore, Congress, it is up to you to take another look. Here are some basic questions to ask Secretary Hank Paulson, then NY Fed President Timothy Geithner, Harvard economist Martin Feldstein, (who was on AIG's Board in 2007) and every equity analyst that gave AIG a buy rating in the Fall of 2007, such as Charles Schwab's equity analyst.
In early 2007, mainsteam media's, New York Times, business writer Floyd Norris, highlighted the un-managed counter party credit risk on credit default swaps with a warning from Monsieur Jean Claude Trichet, head of the IMF, in a speech in April, 2007 to the International Swaps Dealers Association.
Mr. Paulson - As Treasury Secretary, why didn't you investigate, in early April, 2007 when it was well know, that AIG had extended beyond their capacity to make demands on their CDS contracts? "Stupidity?" Why did you wait for the entire house of cards to fall, resulting in billions of dollars flowing to AIG from the taxpayer and then to Goldman? You had ample warning to take action.
Mr. Geithner, as head of the New York Federal Reserve, why didn't you call for an investigation of AIG's unlimited CDS contracts, why did you wait for the entire system to collaspe, over eighteen months later? These CDS losses and positions were fully disclosed in AIG's 2007 annual report. You testified before Congress, these were "new" risks, we just did not understand. The Derivative Project testifies and can give prima facie evidence, these were not "new risks."
Charles Schwab's credit analyst, who rated AIG a buy in fall 2007, why didn't you question AIG management on where the profits were coming from the financial products unit, that far exceeded that of any competitor? Did you question and report on the over $5 billion losses from CDS contracts, outlined in AIG's 2007 annual report and warn all Schwab investors who were paying Schwab a fee for investment management, the impact that the losses from unlimited counterparty risk credit default swap contracts would have on the equity markets? "Stupidity?"
The average American will not be fooled. A major contributor to the collapse of the financial system was quite simple, unchecked counterparty credit risk, which was fraud and the failure of those with a vested interest to keep the charade going.
It has been well-documented The Derivative Project warned Charles Schwab, in October 2007, it is quite likely the equity markets were going to collapse from unchecked counter party credit risk in CDS contracts.
The Derivative Project warned Charles Schwab to protect your retiree's savings, urge them to move to a safer position, until the storm blows over. Please investigate! Schwab, as many equity managers, who have products designed that they only make money if they are in the equity markets, chose their profits over that of the individual retirement investor. A simple example, Charles Schwab's Private Client Investment Advisory Service loses their fee income if they move a client out of equities into cash. This Schwab service is regulated by the Investment Advisors Act of 1940, this is a fiduciary breach. Why isn't the SEC investigating this most basic fiduciary breach, "conflicted advice."
If the DOJ is not going to prosecute for this most fundamental fraud, it is up to Congress to take action and let Wall Street equity analysts and firms know they cannot get away with not doing their due diligence for retirement investors, when they were being paid handsome fees to do so. "Conflicted" investment advice will be investigated and prosecuted.
As Congress meets to reconcile the House Bill and the Senate Bill on financial reform, Americans are watching. We know this was all avoidable. The DOJ has let the American people down. Wall Street abused the system and they don't deserve a second chance.
1. The Lincoln Amendment must be included in the bill, to prevent future "stupidity".
2. Retirement accounts must be protected from any future conflict on interest. The Franken amendment was not included in the final bill, it must be or something drafted that is comparable. Since the AIG equity analysts put their interests ahead of the retirement equity investors, additional steps must be put in place to move all equity retirement accounts out of harm's way of Wall Street greed. New controls must be implemented immediately to protect 401k's, retirement equity funds and investment advice from basic conflicts of interest and fiduciary breaches under the Investment Advisors Act of 1940.
May 21, 2010
Major Swap Dealers' Revenues Will Fall Close to 20%, Why That is Positive
Goldman Sachs was quoted this morning on The Huffington Post:
"Goldman analysts recently tried to quantify the impact of the changes likeliest to survive, including already adopted caps on fees for checking accounts and credit cards, as well as restrictions in the Senate bill on proprietary trading with the banks' own money and the House curbs on derivatives. Those elements alone could shave 17% off bank earnings, Goldman said. Less-likely changes could boost the hit to 23%."
The raison d'etre of The Derivative Project has been to encourage Congress to get the U.S. economy back to the business of building real value to an economy whose GDP has grown increasing dependent on trading income from financial services.
The short term drop of 20% in revenue will impact the economy overall, but this unhealthy dependency on "synthetics" proved to be more detrimental to society overall, than the short-term bump in GDP.
It is time the very bright at Goldman and other major swap dealer banks focus their creative energies on how to restore our economy to a global leader in growth and give up spending the millions lobbying Congress for the "easy", unhealthy money from naked CDS trades.
May 21, 2010
Which Option Should Congress Consider: Lincoln or Merkley-Levin or Both?
MIT Economist, Simon Johnson, in his Blog, Baseline Scenario, discusses the need for Congress to continue to debate "too big to fail." Is the issue that the derivatives legislation and Section 716, which will limit swap dealers access to the Fed window enough to protect taxpayers from a future financial crisis?
Financial "Reform" Bill Passes, Congress Gives Wall Street A Second Chance
Hard to believe after the economy collapses, retirement funds are destroyed, unemployment is at close to 10 %, there are riots in Athens, the Euro is about to collapse, the DOW drops 376 points and Congress continues to fold to Wall Street's interests and not protect the American taxpayer from the greed of basic human nature.
A Ray of Sunlight - Senator Maria Cantwell (D-WA) and Senator Feingold (D-WI) Voted No.
It is a long shot, but perhaps one can with work Senator Cantwell and Senator Feingold to educate the Republicans as to why once again they are caving in to a ticking time bomb. Derivative regulation is not about "big government", it is about controlling human greed in a product that has the capacity to bring down our global financial system, without the appropriate systems to keep the "greed" factor in check.
---There must be 100% transparency, through regulated exchanges and the end user can
work with that. It is just a change that is necessary to protect the global financial system
---Banning naked credit default swaps must be revisited. This is not your normal "short",
which are important in normal economic environments on assets that don't impede the
normal functioning of financial and credit markets.
There was not a "roll call" vote on Senator Dorgan's Amendment to ban naked credit
default swaps. The American people deserve an explanation as to why Congress
is going to continue to allow the type of transaction, multiple naked credit default
swaps that Goldman executed with AIG, that resulted in billions of dollars of taxpayer
dollars, flowing from the taxpayer to AIG to Goldman.
Is Congress aware they are continuing to jeopardize American's retirement savings? Is Congress aware of the misuse of derivatives in retirement mutual funds that this bill allows, thus threatening American's retirement and for that matter money market funds?
The Derivative Project recommends that Congress put in the ban on any OTC derivative, allow all derivatives to trade on an exchange and research over two years how the systems can be developed to protect the American taxpayer, funded by the derivative users.
Prepare a formal statement on why naked credit default swaps are in society's best interest.
Disclose that not a dime of taxpayer money will go into monitoring the speculative CDS trades of 5 Wall Street banks.
German's Finance Minister Says Markets Are Out of Control
The Financial Times had an interview this morning with Germany's Finance Minister,
Schaulbe, we quote from that interview:
“I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”
Germany's GDP, as is that in the United States, is over 24% dependent on revenue sources from financial services. It it out of whack. He calls for an international financial services tax:
"He wants urgently to rewrite the rulebook of the eurozone to prevent any such crisis happening again, and at the same time to revive the momentum of international negotiations on tougher regulation of financial markets. He has returned to the idea of an international financial transaction tax, to make financial institutions share in the costs of the crisis, even if it can be agreed only inside the European Union."
Meanwhile, our equity markets are in turmoil, futures portend a very volatile day. The world needs calm and a strong leader to set a new direction, that has sensible regulation and a strategy to move from an unhealthy dependency on financial services revenues.
May 19, 2010 5:05 PM EST
Cloture Fails and Merkel is Accused of "Moralistic Hysteria"
We in the United States define "moralistic hysteria" as a "populist" amendment as labeled by the securities industry's lobbying organization (SIFMA) for amendments that add actual financial reform of Wall Street.
Cloture failed in the Senate today, which means debate will continue on the financial reform bill, thanks to no votes by Senator Feingold (D- WI) and Senator Cantwell (D- WA). Here is a statement from Senator Feingold from the Talking Points Memo link above.
"After thirty years of giving in to the wishes of Wall Street lobbyists, Congress needs to finally enact tough reforms to prevent Wall Street from driving our economy into the ditch again. We need to eliminate the risk posed to our economy by 'too big to fail' financial firms and to reinstate the protective firewalls between Main Street banks and Wall Street firms. Unfortunately, these key reforms are not included in the bill. The test for this legislation is a simple one - whether it will prevent another financial crisis. As the bill stands, it fails that test. Ending debate on the bill is finishing before the job is done."
It is about time we have some moralistic hysteria, (as Merkel's ban of naked short sales through credit default swaps on Euro bonds is being labeled according to a Bloomberg article), to get real debate in Washington on what is needed to get our economy back on track. It is time to focus on GDP income from real technological growth, not synthetic credit default swap income from naked trades that do nothing but create instability in a global financial system.
Chancellor Merkel knows it is time the big banks give up this ridiculous source of income and focus on avenues to create real value to our economy.
Here in Minnesota, The Derivative Project calls Merkel's "moralistic hysteria" common sense and rational thought, that Americans have been pleading for, from Congress.
May 19, 2010
Congress, Debate The Words Of Merkel Justifying Her Ban
Bloomberg reportedan update by Merkelthis morning. As Chancellor Merkel states, "The markets alone won't correct these mistakes." “The lack of rules and limits can make behavior in
financial markets driven purely by the profit motive destructive
and lead to an existential threat to financial stability in
Europe and even the world,” Merkel told lawmakers in Berlin
today. “The market alone won’t correct these mistakes.”
“There is strong pressure to take action against
speculative attacks,” European Union Economic and Monetary
Affairs Commissioner Olli Rehn said in an interview today in
Strasbourg, France. “Therefore, I can see the reasons for this
decision” in Germany. “It’s important that we now accelerate
the regulatory reform of the financial markets.”
Merkel, who will host international talks in Berlin
tomorrow on financial regulation ahead of the Group of 20 summit
in Canada in June, said Germany will act alone where necessary."
Congress, to yield to Wall Street's pure profit motives, bury your head in the sand, and not debate the societal value of naked credit default swaps, you alone are threatening a stable, international financial system that every American deserves.
May 19, 2010
What Senator Dodd Did to Lincoln Amendment
----Senator Dodd We Must Still Debate on What will Replace the Now Defunct OTC Currency Hedging Markets
Let's hear the debate, Congress on how to make meaningful reform whether it is through the Lincoln Amendment or the Merkley-Levin Amendment.
Opponents of separating out OTC derivatives from banks is the role banks have traditionally played as effectively advising and aiding end users manage their currency exposures and interest rate exposures in the OTC markets.
Commercial banks do understand better than the end user how to use derivatives to hedge, which is not the business of the end user. There is know doubt the commercial banks have expertise to help the end user.
What has changed? What must Congress focus on?
Commercial banks destroyed the trust that was the foundation of the OTC derivative markets. The main derivative market used by end users is the OTC currency market, which is a critical and valuable market.
However, through the violations of the commercial banks of a market based on self-regulation, they destroyed a market based on trust and there is no going back to what it was.
This is what Congress must focus on. The genie is out of the bottle. The OTC markets are dead. Here are the issues for Congress to move quickly to address:
What entity should provide a marketplace for end users to hedge their foreign currency exposures? How should this entity be separated from commercial bank activities?
If the foreign currency OTC market is allowed to continue, should it be split off as a separate legal entity from a commercial bank? Is an OTC market in the best interest of the end user and the average American?
Should the OTC market be limited to commercial banks under OCC and Federal Reserve regulation? What one entity has responsibility for monitoring the OTC FX market?
Should it be commercial banks providing the foreign exchange hedging advice and the spot, forward and currency swaps or does this belong in a separate, new OTC "hedging" exchange with multiple players, beyond commercial banks?
In sum, Congress, let's start debating what the real issues are to ensure the American people are protected and the end user has a new, viable market to hedge their foreign currency exposures that doesn't casue systemic risk to the entire financial system due to greed on the part of the players.
May 19, 2010
E.U. Urges Coordinated Global Action on Naked Short Selling Ban
Arbitrage is fundamental, if there is a discrepancy in one market, traders will quickly move to exploit that discrepancy, eliminating that "opportunity." The Derivative Project supports coordinated action by the E.U. to ban naked short selling in Euro bonds. Here is an article from Marketwatch, this morning on the E.U.'s Commissioner Barnier asking for coordinated action. If there is not coordinated action, the market volatility and uncertainty will increase and cause more global financial instability.
France announced they would not partake in this ban, however the E.U. urged a coordinated E.U. in supporting this ban. One questions if France's stance dates back to the long-term politics between France and Germany.
There are reports that Germany's Merkel grew tried of the inaction of the regulatory front. She took action to force the requisite change.
Think common sense. To benefit from a naked short on Euro Bonds, one needs a credit event. The E.U. needs to protect their system and a major financial crisis. Quite simply, credit default swap exacerbate financial stability.
The Derivative Project is not focusing on banning shorts on the euro on currencies. The culprit is credit default swaps on debt. Ban them, Congress.
May 18, 2010
Food for Thought Senators, Before your Vote, Germany Has Banned Naked CDS
The major derivative banks have long argued, if "Congress bans and limits our derivatives trading, the market will move elsewhere, harming the U.S.." That argument is gone, as the Financial Times has reported, effectively immediately, Germany is banning many shorts, including those on bonds, which means a ban of naked credit default swaps.
In Fall, 2008, Nancy Pelosi sent Congressman Collin Peterson to Europe, to discuss regulation of derivatives for the sake of minimizing instability in the global financial system. Remember, Senators, in the Fall of 2008, our global financial system was on the verge of collapse?
Senators, it will add to volatility and instability, if Germany. has banned naked credit default swaps, but the Senate chooses to "study' the issue. This is now a global marketplace and there must be coordinated efforts, other wise there will be an unhealthy arbitrage causing phenomenal instability in the financial system.
Quite simply, Congress and President Obama, you have been upstaged by Germany's move to ban naked short selling in credit derivatives, today. You have no choice but to do the same.
Senator Dodd, have you forgotten the demonstrations on K Street this week? Unions might not know the technicalities of speculating on derivatives, but they know enough they've been duped and they have had quite enough.
Senator Lincoln understands that, and is standing up, as Senator Dorgan is, for what is right for all Americans, not what Wall Street wants for their bottom line.
The Derivative Project predicts Senator Lincoln will win her re-election bid. Americans are no longer looking for the sweet, bi-partisan talk, they want a leader who will represent them.
May 18, 2010 - 7:45 EST
Hang in There, Senator Dorgan. The American People are Counting On You
One of the root causes of the financial collapse of 2008-2009 was naked credit default swaps.The New York Times Caucus Blogupdates the struggles Senator Dorgan is havingwith Senator Dodd in getting his Amendment, to ban naked credit default swaps, a hearing and a vote. This is the most critical amendment for effective financial reform.
How sad that in our democracy today, we are dependent on a retiring Senator, a lone voice, who is not dependent on re-election, who has the courage to stand up for what is right and what is in the community's best interest.
Here is a quote from The New York Times article, from Senator Dorgan this afternoon:
"Mr. Dorgan continued, “It ought to be a no-brainer. It’s not a
no-brainer in this chamber, apparently. A naked C.D.S. purchase means
that you take out insurance on bonds without actually owning them. It’s
a purely speculative gamble. There’s not one social or economic
benefit. Now my amendment is trying to shut this down. But I’m being
blocked by those who don’t want us to get tough on Wall Street.”
May 18, 2010
If Goldman Asserts they "Understand Risk" then Un -managed Counter party Credit Risk to AIG Had to Be Fraud
Commercial banks have always analyzed balance sheets and income statements and multiple economic scenarios to determine what amount of credit risk is prudent with a given derivative counter party.
As the American taxpayer is aware, Americans gave Goldman Sachs over $10 billion dollars to fund their derivative contracts resulting from a failed counter party, AIG. Goldman can't have it both ways. Either they mismanaged their credit risk exposure to AIG, or they entered into these counter party contracts fraudulently. It is that simple.
Americans need resolution on this issue to go forward with management of retirement assets.
Once the financial reform bill passes, the discussion will move to how American's retirement savings, a phenomenal profit center for Wall Street, must be managed. Wall Street failed to manage American's retirement savings during the most recent crisis. See The Simple Story in yesterday's blog entry, where American's needlessly lost over $3 trillion dollars of retirement assets, due to the neglect of their retirement accounts during the most recent financial crisis. These losses were entirely preventable. Congress must move to investigate Wall Street's role, breach of fiduciary duty, in the management of these retirement assets.
Goldman is arguing, they did not have a fiduciary duty, in their SEC investigation with the Abacus trade. This may be true. However, all those firms managing American's 401k assets did have a fiduciary duty and they breached it.
The Wall Street lobby has pushed too hard to get any meaningful reform on protecting retirement savings in this legislation. They have pushed to prohibit any regulatory entity from enforcing these clear fiduciary breaches. They have pushed to "study" enforcement of the Investment Advisors Act of 1940 for one year, thus ensuring Americans will have no claim for these clear fiduciary breaches, during the most recent collapse of the equity markets, due to statute of limitations.
Once the derivatives are regulated, meaningful reform to protect American's IRA and 401k assets is high on The Derivative Project's agenda. It is indeed unfortunate that Congress is still beholden to Wall Street profits and is taking no efforts to enforce the regulations and laws that they passed in 1940 to protect the individual investor.
May 18, 2010
Filibuster, Senator Dorgan, for that Vote on Naked Credit Default Swaps
The Senate is poised to take a test vote on the financial reform bill tomorrow. Apparently Senator Dodd and Senator Dorgan have not come to an agreement to allow a vote on Senator Dorgan's amendment to ban naked credit default swaps.
This is the most crucial amendment to the entire financial reform bill. Over $80 billion dollars of taxpayer money flowed directly to counterparties on their speculative trades with AIG through naked credit default swaps. Congress does not want to take a vote for their constituents on whether or not this is in our society's best interest?
May 17, 2010
Art Does Imitate Life, Thank you Matt Damon
In The Derivative Project's "The Simple Story" we outlined how art imitates life when First Bank System (ticker USB) let go its CEO in 1988 after his major losses from outright speculation in U.S. government bonds and resulted in the sale of the largest corporate contemporary art collection that symbolized the greed of the eighties.
Those were the good old days, when bank Board of Directors and equity analysts believed banking was suppose to have a larger role and banks were to "do what was in the community's best interest." The good old days are gone. The underlying fabric of our society is a risk.
As outlined in "The Simple Story", The Derivative Project had learned from its Boston University Political Science Professor, Howard Zinn, Matt Damon's childhood next door neighbor, that Washington D.C. will not change, it must come from the people organizing to effect the change. That is the history of our democracy, as narrated by Matt Damon in Professor Zinn's PBS documentary, A People Speak.
Inside Job, just released at the Cannes Film Festival, narrated by Professor Zinn's neighbor, Matt Damon is a work of art. Here is the link to the special screening of Inside Job at the Cannes website. Traditionally Professor Zinn has been associated with the liberal left of the Vietnam era. Ironically, Inside Job, will bring about the necessary change in Washington D.C., not only from the liberal left, but from the Teaparty to the Labor Unions to the Soccer Moms and to the core working Middle Class.
Congress, you might take preventative action before this movie hits the big screens and put in the Amendments outlined in last Friday's post and have the debate, The Derivative Project called for in last Friday's blog post, on the societal value of credit default swaps. Why wasn't what AIG did, not fraud? How can one, individual or corporation, enter into credit default swap contracts without the financial capacity to legally enter into these contracts?
In addition, using credit default swaps to speculate on the demise of California's or Greece's debt, Congress might want to take heed of Mr. Papandreou's discussion of suing American's top banks for the inappropriate use of credit default swaps. It is time to ban them, reinstitute the role of analysts and credit rating agencies.
Everyone, from investor to economist to rating agency, must only rely on the underlying financial and economic fundamentals. Naked shorts on any type of debt are harmful to a smooth flowing global financial system. Debate before the American people, what value credit default swaps bring to a financial system. Then, Congress, please take a roll call vote, so every American can see how their Congressman has represented them on this most crucial issue.
Interest rates have effectively served as the representation of an entity's credit risk. This must remain the case. Credit default swaps have distorted the financial system, as one tends to rely on the "trader's" credit default swap spreads, which are meaningless.
"...They knew what makes nations great and what pulled them down into ruins. And they knew that above all else, how we treat ourselves, as individuals, customers, neighbors, traders and fellow citizens, matters more than just making a living."
May 14, 2010 - Update 4:00 PM EST
Is there a Loophole In Senator Franken's Amendment that Hurts Investors and Limits the Effectiveness of this Amendment?
We will discuss in future posts the deals that Wall Street strikes to allow the law to be put in place, but then to simultaneously prohibit enforcement of these laws.
Senator Franken serves on the Senate Judiciary Committee. We await his response on this criticism of his Amendment on the Credit Rating Agencies.
May 14, 2010
Removing the Credit Rating Agencies Conflict of Interest is Critical -
SIFMA Calls This a "Populist" Amendment
-----Here are the Three "Populist" Amendments That Must Have A Roll Call
-----Here is the Most Critical Debate that Senate Must Have to Restore Faith
In our Democracy
The Derivative Project is going to define "populist amendment". Any amendment that provides real protection to the American taxpayer and is finally getting to the heart of what caused the financial crisis, which will impact significantly the future revenues of the securities industry is "populist." Here is the link to CNBC where John Taft, representing SIFMA, the securities industry's lobbying organization, called these amendments "populist" earlier this morning.
On April 27, 2010, The Derivative Project reported Minnesotans were being short-changed by their Senators, by their silence on what is the most critical financial reform legislation to our society since the great depression. One of our Senators came through on understanding one of the crucial issues that caused the financial crisis, the conflict of interest between credit rating agencies and who was paying them to write their opinion, the entity underwriting the securities.
Senator Franken took action.
The Derivative Project thanks Senator Franken for his outstanding leadership and exercise of rational, intellectual thought to begin to get to the heart of the cause of the crisis. Here is a link to Wall Street Journal that describes Senator Franken's proposed legislation to eliminate the credit rating agencies conflict of interest.
The Derivative Project evolved to bring real value back to our economy, ban naked credit default swaps and quite possibly all credit default swaps, and to implement the necessary regulatory reforms to prevent another TARP bailout.
The Derivative Project evolved due to Congress' inaction and refusal to examine the root causes of the financial crisis. Congress refused to listen to the average American and permitted the U.S. Treasury to use taxpayer dollars to flow to AIG, so AIG could give Goldman Sachs "collateral calls" on speculative bets that Goldman had made through the use of credit default swap contracts with AIG.
It is very probable that the American financial system would not have collapsed if Goldman did not receive these payments, that this was "hype" by Goldman Sachs to get their money out of AIG, before it went bankrupt. Goldman knew that due to bankruptcy law, it was highly probable they would not have recovered this collateral payout in the bankruptcy court, so they pushed Congress to get them "their money."
There was an alternative to the taxpayer dollars flowing to AIG to Goldman. The Derivative Project asked Congress to analyze the impact of unwinding these contracts, in written testimony, as they appeared to have been entered into on a fraudulent basis. If one listens to the oral testimony by Robert Pickel, President of ISDA, (Swaps Dealer's lobbying organization) he said to Congressman Peterson, you assured us this legislation would be forward looking, we can't look back at the contracts that have already be entered into.
The Derivative Project evolved because in February, 2009, there was still no regulatory reform to get our economy back on track and get the risk from synthetic credit default swap income out of our GDP.
It is too costly to the American taxpayer to regulate naked credit default swap positions and these questionable "derivatives" provide absolutely no societal value. It has been shown without a doubt, credit default swap contracts have the capacity for inflicting material harm and instability to the global financial system.
Congress has not provided balanced testimony and rational conversation on the role of derivatives in the financial crisis. There was no one arguing on behalf of the average American taxpayer, as the testimony on the Derivative Transparency Act of 2009 clearly shows on Page 268. Congress has rebuffed the individual taxpayer requesting thoughtful debate on crucial legislation. This is not a democracy. Congress has a duty to provide rational, unbiased testimony to significant legislation.
The Derivative Project asked Congress in written testimony in the Derivative Transparency Act of 2009, to analyze the cost/benefit to the U.S. taxpayer of reversing the collateral call payments to AIG, because they may have been entered into fraudulently. This request was ignored.
Congress is funded by Wall Street lobbyists. The foundation of our democratic system is in question. An individual voice, without the capacity of providing them billions of dollars, asked them to investigate the cost/benefits of unwinding these contracts. This request was categorically dismissed and ignored. At a minimum, the American taxpayer deserved prior to this February legislation passing the House and deserves now, a thoughtful, well researched report and answer as to why this was or was not possible and why it is not possible now.
Does the proposed financial reform protect the taxpayer from future bailouts and does the proposed reform protect American's retirement savings invested in the equity markets where American's lost $2 trillion dollars during the 2008-2009 market crisis?
The answer is no, without the "populist amendments" as called by John Taft of the securities industry lobbying organization, SIFMA, He stated this morning on CNBC that the House and Senate bill were just fine, but now that you have all these "populist" amendments distracting effective reform is it not effective.
Here are the "populist" amendments that are the only ones that have any "teeth" to protect the average American from this ever happening again, that must be supported:
I. Senator Lincoln's Amendment
Senator Lincoln's Amendment to Separate Derivatives Trading from the core objective of the commercial banking system
SIFMA argued in their testimony on the Derivatives Transparency Act of 2009, " about the extraordinary extent to which mainstream American companies depend on CDS (credit default swaps)...to manage their risks. The Derivative Project believes that is a misrepresentation. We contend most credit default swap contracts are used by industry for speculative trades. (more later on these statistics)
Without an amendment to the proposed financial reform bill to ban naked credit default swaps, the American taxpayer has no protection from future bailouts and endless amounts of U.S. taxpayer dollars will be used to "regulate" speculative positions that bring absolutely no value to our GDP. Republicans, Congressmen Bachman, take note, these dollars used to monitor speculative trades on credit default swaps, which are significant as testified by industry experts, could be used to pay down our budget deficit.
Congress Must Have This Debate Before the American People, so They can Urge their Senators to Make an Informed, Rational Vote on the Most Crucial Reform To Society Since the Great Depression
Congress must have a hearing with intelligent debate on whether or not credit default swaps are harmful to the U.S. system. Debate these three questions, publicly and then have Senators take a public stance on these three questions:
1.) Is the U. S. Financial system more stable if we continue to value the traditional role of
the research analyst, in addition to an unbiased credit rating agency, to evaluate and
form an opinion on a corporation's financial stability? If an institutional investor or a
retail investor is going to invest in a corporation should they also always buy a credit
default swap or should they rely on the analysis of a equity research analyst? How are
the spreads on credit default swaps determined if there is no underlying asset and no
agreed upon factor that is going to define "a credit event".
Using SIFMA's logic, from their testimony before Congress, should every equity
investor buy a credit default swap on the equity they purchase to protect themselves from a loss if the stock they purchase might decline in value, because the equity
analyst made an incorrect analysis?
2.) Is a credit default swap a derivative, if it has no underlying asset? Is there a societal
benefit and reason to use taxpayer dollars to monitor these contracts or to even allow
them to exist?
3.) Should Congress request an analysis on whether or not there were alternatives to the
use of taxpayer money for making payments to counter-parties under AIG's CDS
contracts? Were these contracts entered into fraudulently, since it is apparent under
normal market/economic scenarios, AIG did not have the capital to meet their
obligations under these contracts. If not, inform the taxpayer why Congress will not
request this study.
Here is one research analyst's opinion on the societal value of synthetic cdos, which would not exist, without a credit default swap.
An Unusual Sell-Off 20 Minutes Before the DOW was Down 1000
The Derivative Projectnormally does not comment on technical stock market movements. However, ironically The Derivative Project has been following the use of derivatives in Black Rock funds, particularly HYV.
As a shareholder in this fund, we have placed calls to Black Rock portfolio managers about certain derivative positions in HYV. They refuse to return our call.
At about 2:20 EST, HYV dropped precipitously, without explanation. As you can see at the link above to the inter- active chart HYV dropped without explanation, independently of other comparable high yield funds, like JNK. It dropped independently of the drop in ten year treasuries and the DOW. When The Derivative Project questionned Charles Schwab, (where this position is traded) about this unusual movement, their explanation was there was nothing unusual it tracked the decline in the 10 year note. Why is Charles Schwab misleading a "retail investor?" This decline did not track the drop in the 10-year treasury, this decline happened 20 minutes before, when Charles Schwab then shut down its trading desk for the rest of the day.
As the attached link to HYV(Black Rock High Yield), JNK(Barclays High Yield), THX (Ten Year Note) and DJI (DOW) indicate the precipitous drop in HYV was 20 minutes before the drop in JNK, THX and DJI.
The Derivative Project made a trade in HYV at Charles Schwab at 2:25 PM on HYV. At 2:45 EST, The Derivative Project tried to close out some positions during the 1000 DOW decline. Charles Schwab had shut down its online trading, its phone lines and calls to a local branch said "Sorry, but no one can trade."
The Derivative Project contacted Charles Schwab yesterday to try to reach an agreement for a settlement for the harm caused by the inability to trade from 2:45 to 4:00PM EST. Charles Schwab's response was "sorry, tough luck , that is not our problem." We can shut down our trading operations whenever we please.
For those readers that are not aware, Black Rock was selected, without competition to manage the disposition of the government "inherited positions" in CDO's.
Here's a link to a March 2010 article on Blackrock from the blog Naked Capitalism.
The Derivative Project is not a hedge fund. The Derivative Project exists to ensure a fair market place for all and an economy that is no longer based on a GDP that is dependent on income from senseless synthetic trades, that cause more harm to the fabric of our society, than income they deliver to our "bottom line."
Can you imagine the cries of foul if any large trader was blocked out of the markets from 2:45 to 4:00 PM EST on Thursday, May 6?
Based on Charles Schwab's actions and the most unusual, unexplained movement in HYV, something is clearly "rotten in Denmark."
May 6, 2010
Was It an Error? ...and The Senate Just Voted Down the Kaufman Amendment
The Derivative Project was disheartened to see Andrew Ross Sorkin of The New York Times justifying the Abacus sale after Mr. Buffett defended Goldman's rogue Abacus "security" combining CDS insurance on the weakest of the weak cdo's, that provided the "Big Short" for Mr. Paulson and caused billions of dollars of losses to those institutions that purchased the Abacus CDO.
She agreed that a "study" was not necessary, that given the Milan and Washington State interest rate swap trades, perhaps the SEC does need to tell Goldman, investment bankers and brokers, we will not allow you to sell "snake oil." The Derivative Project believes it is the Milan court system that we have to thank for this reversal in the SEC imposing a fiduciary standard.
However, we move to the image of the violence in Greece today, live on TV, the U.S. Senate voting down an amendment to end too big too fail banks, while the DOW unexplicably, in the timeframe of about 15 minutes, dropped 600 points.
The Goldman Abacus trade, a 600 point drop in the Dow in 10 minutes, violence in Greece, in a normally peaceful country, brings us back to basics. Where are our leaders? The unprecedented volatility, 600 point drop in the U.S. Markets is not an error. Don't believe that for a minute.
We need leaders in Euroland and in the United States. Time is of the essence. Derivatives have brought the global marketplace to an interdependent, fragile network. We need Monsieur Trichet, Ms. Merkel and Mr. Obama to move together for an unprecedented global conference. We all know in our hearts this is quite basic. The 600 point drop in the DOW was caused by a trader that figured out the system. It was greed pure and simple.
Some have suggested the timing was to show Congress as you consider your regulation of Wall Street, "who is in charge."
The 10-minute 600 point drop on the DOW was not an error. This is a global crisis of ethics and morality and only strong leaders can pull us back to normalcy. It is time for a global leader to take control, this is now beyond FDR's fireside chat. We needed that before the TARP and the President and Congress failed us.
We need multiple leaders to speak to the global marketplace. Lay out the strategic plan. It is no longer the U.S., Greece, the dollar, the Euro. We are in this together. There is an unprecedented global crisis of confidence. Individuals are angry at their governments.
What is driving the violence in Greece? Don't bury your head in the sand and think that Mr. Buffett justifying Goldman's actions, that the New York Times supporting Mr. Buffett's defense of a "snake oil trade", that the 600 point drop in the DOW in ten minutes was a "machine error" and this is not significant. This does relate to the violence in Greece. The issues are far beyond Greece's "lack of fiscal restraint."
There is an unprecedented global fragility. The U.S. dollar is now still somewhat the safehaven, but the global marketplace is confused. Perhaps one must turn to gold. One needs something real. It is now apparent that our greed and lack of ethics is impacting the global marketplace. The U.S. Congress and President Obama have no choice. Are we are country of unbridled greed, with no ethics, or can we work with others to design the strategy to return to global stability?
May 3, 2010
Ms. Bair is Mistaken: Major Banks are No Longer Indistinguishable From Hedge Funds
Sheila Bair agreed over the weekend that Senator Lincoln's proposal to separate out the derivative trading from FDIC insured banks would exacerbate the issue. Ms. Bair argues, that by moving this trading from banks, that the FDIC regulates, would create more risk, since this activity would then move to "riskier" hedge funds or overseas.
What Ms. Bair has forgotten is commercial banks, major swap dealer banks, have shown the old tenet of putting community first is dead. The over-the-counter markets are dead. Congress has no other option. This is why all derivative trades must trade on regulated exchanges. There will no longer be the need for a FDIC regulator on these derivative trades, they will not go to "riskier" entities like a hedge fund or "AIG" because there will be transparency and appropriate collateral, when they all trade on a regulated exchange. As the FDIC is not involved in monitoring futures on wheat, the FDIC will not be involved in monitoring futures on currencies. Congress must accept the death of the OTC markets and focus on how to protect society from future abuses, while at the same time minimizing costs and hassles to the end user. At the same time, the end user must respect these regulations are for the good of society as a whole, and they must work with Congress to create a system that is workable. It is the major swap dealer banks that have caused the end user this major complexity and increase in hedging costs as a result of their own self-interest.
The Appearance of Conflict of Interest is Conflict of Interest
Mr. Buffett spoke on CNBC this morning justifying Goldman's Abacus trade. He made the comparison that ACA's insurance of the underlying Abacus assets, was no different than insuring State of California or State of Virginia bonds. There will always be someone on the other side of this "bet."
What is different, Mr. Buffett, is there is a bona fide income source backing State bonds, such as income tax revenues. As the Wall Street Journal discussed in an article this morning, traders looked long and hard to find the right cdo's to short and there were not enough of them out there. So Goldman, and others, created synthetics to create that perfect cdo to short.
What this did was to magnify the losses. "In effect, the documents said, Wall Street was "copying and pasting" what turned out to be the worst performing securities of the mortgage boon." "In one case, a $38 million sub prime mortgage bond caused $280 million in losses."
Is there difficulty in an $5 billion investor in Goldman Sachs, Mr, Buffett, seeing that this behavior is quite different in analyzing whether or not to take on bet on California bonds?
The Derivative Project has been calling for a fundamental shift, in Congress and our U.S. Department of Justice, on taking a stand on the fundamentals we as a nation hold dear.
The New York Times in Floyd Norris column repeated the mantra, "caveat emptor" in the Goldman trade under investigation by both the SEC and the Justice Department.
Mr. Norris, there are always ways to twist the story, but we all know in the end, "...They knew what makes
nations great and what pulled them down into ruins. And they knew that
above all else, how we treat ourselves, as individuals, customers,
neighbors, traders and fellow citizens, matters more than just making a
April 29, 2010
The World is Watching Your Debate
The filibuster has ended. Debate will now begin on the Senate floor. Congress, Republicans and Democrats, do not lose sight of what you are debating. You will be voting on the future of our democracy and the ethics and principles we hold dear. You will be taking a stand, as Simon Johnson, MIT Economist, has said, against "the oligarchy" that has evolved in our country.
Legal or not, Goldman and other's "machinations" with swaps and synthetics have destroyed our international reputation. One can argue it was Greece's "own fault" for hiding their excessive debt, but one could also argue American banks hepled them do so.
The Milan courts are suing our banks on what we believe is "perfectly legal." Once again, is that where we want our GDP to flow from, abusing the municipalities, or the "widows and orphans." as Monsieur Tourre of Goldman wrote in an email?
Mr. Reich, economist wrote in the Financial Times today about the influence of money from Wall Street towards Washington. We have also felt that reach in the heartland with our own Senators, not taking a visible position that is counter to that of Wall Street's and not responding to our pleas to understand the changes we believe are necessary.
Congress, it is critical for the future of our democracy that you stand up for what we all have in our hearts represents the concept of an American.
The proposed bill lacks the tools and the changes to implement the regulation to rein in the abuses of Wall Street, Democrats and Republicans have caved into Wall Street on this most critical issue. Here is what the bill must include to restore the reputation both within the U.S. and internationally:
Give a regulatory body immediate authority to enforce abuses of the Investment Advisors Act of 1940. (This would include authority to enforce breaches of fiduciary duty such as that in Milan and Greece.)
Throw out the rascals at the SEC who are conflicted, not to mention those that are earning over $200,000 and spend their days studying porn.
Bring in unbiased, industry experts, who sign a statement they will not take a position in the Administration for 4 years following their work in the SEC. These "industry experts" would not be attorneys. They would be commercial and international bankers who understand how to make a credit decision. These experts would come from outside Harvard, Wharton and the normal business schools that were complicit in allowing the collapse. The bill would insist on a balance of SEC regulators from the Midwest, from the South, and from the West.
Ban "industry" arbitrators, conflicted by definition, from any FINRA arbitration panel, effective immediately.
Financial literacy should not be focusing on educating the individual investor. Financial literary must focus on the CFA's and 401K money managers that either did not know what a swap was or was negligent in their analysis of AIG and excessive counter-party credit risk. Determine what they failed the individual retirement investor in the most recent crisis. What Goldman and other banks did with derivatives was easy to follow. You just have to understand the underlying fundamentals and ask the appropriate questions.
Ban regular stockbrokers from providing any advice to a retirement account. Set-up new standards of training for any advisor providing investment advice to a retirement account. Work with a much broader range of experts, outside industry, to craft what educational standards are necessary for a retirement advisor.
Without these critical changes to the financial reform bill, there is not any financial reform and you are once again choosing Wall Street over Mainstreet.
By Congress choosing to study, "these issues", as the proposed bill outlines, you are telling Mainstreet do not put a dime in your retirement account into the equity market, until you finish your study. You are telling the retirement investor, we are choosing Wall Street's profits, over your losses, in the most recent financial crisis. We are choosing Wall Street's profits over the future reputation of an American in Europe and the world.
April 28, 2010
Congress, Common Sense Eludes You
Sophisticated investors and little retirement investors were sold snake oil. Congress, you are proposing to "study" this fiduciary breach for another year, to the benefit of Wall Street. You are proposing to study how to enforce existing laws, passed by Congress in the 1930's and 1940's.
It is critical that the SEC and the appropriate regulatory body have the capability to enforce the existing laws, under the proposed reform bill, immediately.
April 27, 2010
Investment News is Worried Hearings Might Result in Fiduciary Standard
Congress, please remember there are brokers/advisors that were subject to the fiduciary standard during the financial crisis, 2007-2009 under the Investment Advisors Act, but individuals have no recourse under the current law until Congress gives FINRA or any regulatory body the ability to allow them to file claims under this law.
Congress, make sure this change is put immediately into the proposed financial reform bill or you have permanently harmed the retirement investor under their current claims under the Investment Advisors Act of 1940, resulting from the Investment Advisors Act of 1940.
Please ensure the sentence highlighted in previous blog posts by The Derivative Project is in the proposed legislation. Don't hesitate to write or comment to The Derivative Project at firstname.lastname@example.org on why or why not you will not support this important change for the individual retirement investor. The Derivative Project will promptly post your response.
Further, for any questions on the pending proposed addition, contact email@example.com.
The Derivative Project has a very large international audience, in addition to many U.S citizens ranging from Bejing, Moscow, London, Estonia, Sicily and Italy for example. These international citizens and corporations are following the lead of U.S. Congress on a daily basis, as they too have been dramatically impacted by failures in the U.S. financial system.
April 27, 2010
The Derivative Project Gets No Response on Press Inquiry
The Derivative Project contacted Senator Klobuchar's and Senator Franken's offices for a statement on whether or not they support adding the sentence highlighted below to the proposed Financial Reform bill that is slated for a vote this afternoon.
Here is the request to the Senators' offices for a response by 3:30 PM today:
"Do you support adding to the proposed financial reform bill this statement" - "This financial reform bill will authorize, effective immediately, the SEC to provide FINRA enforcement authority over member broker dealers and their associated persons to enforce rules under the Investment Advisors Act of 1940." This sentence is crucial to enable an individual retirement investor to file a claim with FINRA or in the U.S. Court system for a breach under this law.
Individual retirement investors lost over $3 trillion in retirement savings under the 2007-2009 financial crisis. They are entitled by law, the Investment Advisors Act of 1940, to file for damages if their was a breach of this law. The securities industry has lobbied Washington and Congress will not give individuals the right to file a claim through FINRA or the U.S. court system under this law.
Senator Franken and Senator Klobuchar would not respond to The Derivative Project's request if they support this addition to the financial reform bill and if not, why not?
Hm...The Derivative Project is getting more and more concerned that the lack of response is signaling the end of the democratic system as we know it and the far, far reach of the Wall Street lobbyists big money. We would like to believe otherwise.
April 27, 2010
Minnesotans are Being Short Changed by Their Senators
How can you explain to the average Minnesotan that neither of their Senators have posted on their websites a position on the proposed Financial Reform bill? Are our Senators worried about losing funding from Wall Street? I think we need to hear why our Senators refuse to take a position on this most critical reform, that has caused the worst financial crisis since the Depression and high unemployment, high deficits and significant loss to retirement savings.
The Derivative Projects has heard from Minnesotans saying we need to hear why when Minnesota constituents call the Minnesota Senators' offices the Senators cannot tell the constituent what the Senators' position is on substance of the financial reform bill.
Financial reform is more critical than health care reform, than immigration reform, etc, because without a robust economy none of the other issues matter. We cannot have a safety net if government does not have the money to fund it. There will not be funds to protect those that need a safety net, fund a strong education system, environmental protection or to invest in health care for the unfortunate, if we do not have a sound financial system that allows for a robust economy that is not dependent on a GDP that is 20% derived from speculative bets by financial institutions, through misleading trades that prey on the uninformed.
Congressmen Bachman and Paulson have not been afraid to publicly post a position on financial reform. We expect the same of our Senators.
April 27, 2010
Live Blog from Senate Goldman Hearings
Mr. Tourre of Goldman just said the average retail investordoes not understand these sophisticated products. "These products allow sophisticated institutions to better manage credit risks..."
Sophisticated institutions know how to manage credit risks. They sell the bond if they are uncomfortable with the underlying fundamentals. They make prudent credit extensions, based on detailed analysis of the balance sheet and income statement.
The retail investor understands, Monsieur Tourre, a sophisticated investor, Goldman Sachs, did not manage its credit risk, but had the tools, as you say, to do so.
Monsieur Tourre, Goldman Sachs is a "sophisticated institution" that did not know how to manage credit risks. Goldman Sachs allowed itself to be exposed to counter-party credit risk with AIG that caused the collapse of the entire financial system, that caused the necessity of billions of taxpayer dollars to make collateral calls on Goldman's lack of prudence and fraud in entering into these financial contracts with AIG.
Monsieur Tourre, why didn't Goldman Sachs as a sophisticated investor, manage its counter-party credit risk with AIG? This was a very elementary credit extension that the retail investor now understands could only have been fraud, because sophisticated investors have the sophisticated products to manage credit risk.
Monsieur Tourre, if The Derivative Project's counter-party credit risk analyst saw this credit risk in 2007 to AIG in credit default swaps, you can be sure the sophisticated Goldman Sachs was well aware of this credit risk. Why didn't they manage it?
April 27, 2010
Credit Default Swap Contracts Were The Vehicle Used To Short In Abacus
Credit default swaps were the vehicle that Mr. Paulson used to short the Abacus mortgage CDO's. Senator Levin is conducting hearings right now. Senator Levin is currently speaking about the culture and reckless actions of Wall Street executives and "unbridled greed" and the lobbyists lining the halls outside the hearing room, determined to continue Wall Street's "self-interest" and gambling.
The Derivative Project came into existence to alert Americans about these credit default swap positions held by banks betting on the failure of our economy and our municipalities.
The Derivative Project seeks to educate the American public on where their taxpayer dollars went in the fall of 2008. There was not transparency. They were not told billions of taxpayer dollars were being used to pay Goldman Sachs collateral calls on speculative credit default swap positions. The appearance of conflict of interest is conflict of interest, Secretary of Treasury, Hank Paulson.
The Derivative Project came into existence to protect the average American's retirement savings. Many CFA's manage your retirement dollars. They have an ethical responsibility and fiduciary duty to understand derivatives and to do what is in your best interest. CFA's represent on their website they are trained in derivatives. Why weren't they advising those close to retirement on in retirement to take some equity profits and move to a more conservative position? Quite simply, they would have made less money if they had moved part of retirement portfolios to cash.
These "investment advisors" put their interests ahead of your interests. That is a breach of fiduciary duty under the Investment Advisors Act of 1940. However, a little known fact is, all though President Roosevelt signed this law into effect in 1940, the securities industry has successfully lobbyed Congress so you, the average retirement investor, cannot make a claim under this law in the U.S. courts.
It was the credit default swaps that Goldman used, without managing counter-party credit risk with AIG, that required the average American taxpayer to payout of our own pockets billions of dollars on collateral calls to help-out Goldman Sachs on their speculative trades.
The State of California took action, as our Resolutions Page proposes. It is as simple as that. Americans will continue to take action. Congress has not protected us and today having not passed a financial reform bill, Americans must continue to take personal responsibility to save the fabric of our society.
Credit default swaps are principally being used to short municipal debt and mortgage debt of the average American. Is this a short that is of value?
Interest rates indicate the credit worthiness of the underlying bond. Credit default swaps bring no value as a "short."
They are not a hedge. If one is uncertain about the credit worthiness of the bond, sell it! Don't buy it. Farmers must use derivatives to hedge future sales of corn. The small importer must use derivatives to hedge its purchases in yen. Credit default swaps are not necessary. They are not a derivative. Credit is not an asset from which a value may be dervied. They are a speculative tool created to speculate.
In sum, credit default swaps are an incredible profit source for bankers and they are fighting hard in Congress, as we speak, to save this income source. The financial institutions are forcing the American taxpayer to pay millions of dollars to monitor their speculation on the debt of our housing market and our municipalities.
If Congress doesn't move swiftly to ban this destructive behavior, destroying American's global reputation, American's will continue to move ahead demanding the transparency of the institutions engaged in this egregious behavior. We do have the right to stop doing business with those that do not represent the values of our society:
"...They knew what makes
nations great and what pulled them down into ruins. And they knew that
above all else, how we treat ourselves, as individuals, customers,
neighbors, traders and fellow citizens, matters more than just making a
April 27, 2010
"They Were Told They Could Not Lose"
Once again anger and perhaps lawsuits are brewing in another small Italian village that Americans love to visit. This little village is struggling financially under the burden of multiple interest rate swaps, with high fees and interest rate mismatches. They were structured as inappropriate interest rate hedges. The village was told "they could not lose, by entering into these transactions." Here is the article from this morning's Washington Post.
As this continues, how do you think these small villages are going to welcome the American tourist? Why is Congress not moving swiftly to ensure as Senator Blanche Lincoln's bill proposes, that passed the Senate Agriculture Committee, a fiduciary standard between swap dealer bank and client?
Fabrice Tourre, who will testify this morning before the Senate in Senator Carl Levin's Hearing on Goldman, said in an email, "Sold another one to widows and orphans..." To the small Italian village struggling under the weight of inappropriate hedges to the American retirement investor that was sold inappropriate product or had an investment advisor that did nothing to protect the losses as the DOW dropped from 14,000 to 6500, please, Congress, explain what the delay is all about?
Municipalities, non-profits, and American's retirement accounts need protection from this abuse. These entities must have a fiduciary standard and have recourse to file a claim, which an individual currently does not have for their individual retirement account.
The Democratic Senator from Nebraska Votes Against the Financial Reform Bill
Warren Buffett worked over last weekend to have a provision inserted that Berkshire's current derivative positions not be subject to proposed collateral requirements. Mr. Buffett, here is why your position is harmful to the American taxpayer.
OTC markets with players such as AIG, Goldman and Bear Stearns all "had" on their balance sheet excellent credit and the capacity to support their derivative positions. These entities all abused their fiduciary duty and did not due sufficient credit analysis of their counter-parties. It has nothing to do with Berkshire's credit position. Is Berkshire capable of understanding how to manage the counter-party credit risk of all derivatives? Apparently the "brillant" bank. Goldman Sachs was not able to manage their counter-party credit risk with AIG, so why should the American taxpayer believer Berkshire Hathaway will be able to do so?
The derivative reform is not about reining in innovation and putting in more tough regulation. The derivative reform is about reining in greed and abuse of fiduciary duty.
Mr. Buffett, short of full disclosure, and allowing the American taxpayer online access to your balance sheet and income statement, so we know for certain at any point in time if Berkshire is being prudent and managing counter-party credit risk, we don't know why Berkshire should be entitled to this exception.
We recommend the Senator from Nebraska put self-interest aside and work for the appropriate controls to ensure the taxpayer is protected and the small Italian village. As you are were aware, The Derivative Project is a very strong proponent for minimizing costs to the end user for their most critical derivative trades. Propose some intelligent restrictions for protecting the taxpayer on the derivative positions that are on the books that are in everyone's best interest, not just Berkshire Hathaway.
April 25, 2010
President Roosevelt 1940's Investment Advisor's Law was in his Words an "Aid To Honest Business Men"
In 1940 Congress Voted Unanimously to Pass The Investment Advisors Act of 1940 to protect Investors
In 2010, Congress Must Take Immediate Action to Allow Individuals Their Due Process Under this Law
As many Republicans say, "We must take action to enforce the laws that are already on the books."
On August 25, 1940, the New York Timesquoted President Roosevelt, upon signing into law the Investment Advisors Act of 1940. The Derivative Project quotes President Roosevelt from this article:
"I have just passed the Investment Company Act of 1940 and the Investment Advisors Act of 1940, legislation which both houses of Congress passed unanimously. They mark another milestone in the Administration's vigorous program to protect the investor.
As the pressure of international affairs increases, we are ready for the emergency because of our vigorous effort to put our domestic affairs on a true democratic basis. We are cleaning house, putting our financial machinery in good order. This program is essential, not only because it results in necessary reforms, but for the much more important reason that it will enable us to absorb the shock of any crisis."
President Roosevelt went on to say, "It is a source of satisfaction that business men have at last come to recognize that it is the Administration's purpose to aid the honest business man and to assist him in bringing higher standards to his particular corner of the business community."
"This in itself is enough to demonstrate that we have come a long ways since the bleak days of 1929, when the market crash swept away the veil which up until then had hidden the "behind the scenes" activity of our high financiers and showed all too clearly the sham and deceit which characterized so many of their actions."
"Those at the top juggled corporations for selfish purposes. This situation was contrary to the American way of life, and, had not the holding companies not been checked, they would have threatened the very existence of our democratic process."
President Roosevelt's words are echoing now in the ears of all those that lost their homes, their jobs and their retirement savings or their life savings from the Madoff affair, because the Investment Advisors Act was not enforced by the regulatory authorities as this bill intended.
Congress, without taking immediate action by voting unanimously to give this law the "teeth" that Congress intended in 1940, you are threatening "the very existence of our democratic process."
April 24, 2010
Financial Reform without Investor Protection is Not Financial Reform...Congress You Must Add One More Sentence
Here is the sentence: "Effectively immediately, FINRA has the power to enforce violations under the Investment Advisor's Act of 1940."
It is that easy.
Wall Street has lobbyed hard against this. It appears that Congress has given in once again and put the small retirement investor subservient to the profits of Wall Street.
This is unconscionable. August 24, 1940, President Roosevelt signed into law The Investment Advisors Act of 1940 to protect indiviudal investors from harm and abuse by investment advisors. This law is on the books, however Congress has not given FINRA or any regulatory body the right to enforce this law, so that an individual may make a claim in arbitration to FINRA or in the U.S. Court system.
Congress was once again lobbyed hard by Wall Street and agreed to "study the issue for another year."
Why This Issue Cannot Be Studied for One Year
From October 2007 to March 2009, there was the largest drop in American History of individual retirement savings, when the Dow plummeted from over 14,000 ot the mid-6000's.
If Congress "studies the issue" any individual retirement account that was harmed by a violation of The Investment Advisors Act of 1940, will lose their right to a claim under this law, due to Statute of Limitations.
Congress is indeed putting Wall Street's interests ahead of the hard-earned savings of the average American.
Why This is the Right Thing to Do and Why It is So Easy
This law is on the books. Can you explain to the average American what laws have been passed by Congress where the individual has no right to sue in the U.S. Court system if there is a violation of this law?
This is unconscionable. This a basic legal right that you are denying to an individual retirement investor.
Why It Is So Easy
It will take time to study who the appropriate regulatory authority is. FINRA, as a self-regulatory body, enforcing their own rules is clearly conflicted, by definition.
However, why Congress is studying the issue give the U.S. Courts or FINRA the ability to enforce this law, immediately. It is the only "legal" thing to do.
Just add the one sentence above.
This sentence is not dealing with the issue currently whether or not the broker or investment advisor is subject to the fiduciary standard and should that be changed. This one sentence is only added for those individual retirement investors who were harmed by investment advisors to whom they paid a fee to, that the U.S. Courts currently recognize are indeed subject to the Investment Advisors Act of 1940, based on existing case law.
Why the Individual Retirement Investor Needs This
First of all, the law was passed in 1940 and when an individual entered into a contract for investment advice, in 2007, they were given a disclosure from the securities firm that they were covered by the Investment Advisors Act of 1940. They relied on this. They just weren't informed that Congress wouldn't let the individual investor make a claim under this law.
Here is but one example of why you must insert this sentence. There were some major breaches of this law by CFA's and multiple investment advisors that were warned by The Derivative Project in 2007, that it would be prudent to take some equity profits for their retirement clients, because based on AIG's unchecked counter-party credit risk, it was possible the financial system would collapse and bring down the equity markets.
These CFA's and investment advisors, who took in fees for investment advice, were warned and advised it was only prudent to protect their client's equity retirement assets. They chose not to, because they would have earned less money. This is a clear and simple breach of fiduciary duty under the Investment Advisors Act of 1940.
The Derivative Project's concern is for the retirement clients in their 60's, many who have a legal right and remedy for this breach of fiduciary duty, but are restricted by Congress from exercising this legal right.
Many know it may be a lost decade in the stock market with high unemployment and increased budget and trade deficits. By postponing adding this one sentence, retirees
have lost forever their hard-earned retirement savings because of Congress' own inaction and preference to choosing the interest of the securities firms over allowing the retirement investor to make a legal claim to which they are entitled to under U.S. law.
Please take the time to put in this simple sentence to restore the average American's faith in our democracy.
April 23, 2010
In 1940, Congress passed the Investment Advisors Act of 1940 to protect individual investors from the breach of fiduciary duty by investment advisors. Curently, since October 2007, any broker that gives investment advice for a fee is regulated by this act and must act as a fiduciary.
These brokers or investment advisors are regulated by FINRA. However, if they breach their fiduciary duty under the Investment Advisor Act of 1940, you can't claim any damages. You are screwed. Congress has not granted FINRA the authority to enforce this law to protect individual investors.
Congress passed a law in 1940, but an individual investor has no legal remedy to get damages under this law, if the investment advisor breaches their fiduciary duty. You can't go to the U.S. Court system and you can't go to the regulatory body, FINRA.
Here is an example. You have an IRA. You pay a quarterly fee for investment advice. The broker ignores your request to sell all your equities and put you in cash because your financial circumstances have changed. The broker refuses to do so, because the compensation structures benefits the broker if he has more money in equities in lieu of cash. He breaches his fiduciary duty, because he put his interests over yours. He losses your life savings, because of this breach. You are out of luck. You have no recourse for damages.
The Derivative Project assumed that under the proposed Financial Reform Bill, this would change. Over $3 trillion dollars were lost in American's retirement accounts. The Derivative Project assumed that FINRA would be given authority by Congress to enforce the rules put forth in the Investment Advisors Act of 1940, particularly after a $3 trillion loss in Retirement accounts.
The Derivative Project checked in with the Senate Banking Committee today. They refused to provide any information on this issue. Being based in Minnesota, The Derivative Project checked in with Senator Franken's staffers. They were clueless and not at all helpful. Their banking staffers did not return emails or phone calls.
The Derivative Project wrote today to a "potential" Supreme Court Candidate, Senator Klobuchar, and her banking staff also knew nothing about the financial reform bill and how it would be incredibly valuable to protect an individual's retirement account from breach of fiducairy duty. Her banking staffer responded to The Derivative Project, based on the email below, "That will take a lot of research. I don't know anything about laws from 1940 and the bill is over 1400 pages long, it will take a long, long time to figure this out."
"Dear Senator Klobuchar:
With your legal background, only you can get this most critical
sentence into the pending financial reform legislation. It appears
without this sentence the Wall Street firms have once again outwitted
Congress and will provide irrepreable harm to individual retirement
accounts (IRAs) that were harmed due to violations of the Investment
Advisors Act of 1940.
Please ensure the financial reform bill states:
Effectively immediately, FINRA has the power to enforce violations
under the Investment Advisor's Act of 1940.
Here is the issue and why this statement cannot be left out from the
There is no enforcement authority.
This is taken from a FINRA speech last February:
Interim Chief Executive Officer
Testimony Before the Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
Committee on Financial Services
U.S. House of Representatives
February 4, 2009
Mr. Luparello states:
"FINRA is the largest non-governmental regulator for securities
brokerage firms doing business in the United States. Congress
mandated the creation of FINRA’s predecessor, NASD, in 1938. Congress
limited our authority to the enforcement of the Securities Exchange
Act of 1934, the rules of the Municipal Securities Rulemaking Board
and FINRA rules. Under our fragmented system, broker-dealers are
regulated under the Securities Exchange Act and investment advisers
are regulated under the Investment Advisers Act of 1940. FINRA is not
authorized to enforce compliance with the Investment Advisers Act.
Authority to enforce that Act is granted solely to the SEC and to the
There has been no response from Senator Klobuchar's office.
The Senate is debating this weekend what will go into this bill. This statement is not in the bill. Please write and call your Congressman now, to ensure it is included:
Effective immediately, Congress gives authority to FINRA to enforce the Investment Advisor's Act of 1940.
FINRA may or may not be the best regulatory agency to monitor investment advisors, but at a minimum, Congress must give them the authority while they are "studying" the issue, so the average retirement saver has recourse to protect themselves for any breaches of the Investment Advisors Act of 1940., from 2007 to present and until a final conclusion is reached on what agency will have this authority.
Once again, the average American that has worked hard saving pennies out of every pay check to go to retirement savings has no protection.
It is not complex. The average American wants protection right now, effective September 2007, for any claim under the Investment Advisors Act of 1940. The average American is entitled to that under the Investment Advisors Act of 1940.
The average American will not lose their right to file a claim under this act because Congress has given in once again to Wall Street and is just going to "study the issue" so the statute of limitations is up on a claim.
The average American has learned from the collapse of the economy, the 10% unemployment rate, and the destruction of retirement accounts. The game is over.
The average American that is due to receive a claim for a breach of the Investment Advisors Act of 1940 will either get it from Wall Street or from a fund that every taxpayer pays into. Congress, the American people will not be duped twice.. The Emperor Has No Clothes.
April 22, 2010
The State of California and Now a German Corporation is Taking the Lead - Shame Them
The Derivative Project supports the actionof the Germancorporation, Bayern LB, for discontinuing their relationship with Goldman Sachs, following the SEC fraud charges. Here is the report from CNBC.
The Derivative Project knows Wall Street reform might not go far enough, although the momentum is building for greater limitations on derivatives, far more than anticipated when The Derivative Project began.
We repeat it is up to every individual to stand up for fair, honest, transparent and ethical actions in trade and commerce. To do otherwise, destroys the fabric of our society.
It is not a question of "Did Goldman Break the Law?" Of course they did. They breached their fiduciary duty. The Milan Courts are suing investment banks on a comparable issue. We all know they entered into credit default swap contracts with AIG, brokered AIG credit default swaps on behalf of Societe Generale, when AIG did not have the financial capacity to fulfill these contracts. This is why Secretary Treasurer Hank Paulson and Goldman rushed through the TARP proposal and bailout of AIG.
Quite simply Goldman wanted U.S. taxpayers to fund AIG collateral calls. Goldman knew they would lose in the bankruptcy courts. The problem is the U.S. Courts are lenient on this ruse. The SEC is trying whatever legal remedy they have to rein in this fraudulent behavior. It is not easy, which is why individual corporations, municipalities and individual investors must choose to shame these banks and expose their fraud and deceit and do business elsewhere. The Courts and Congress will only go so far.
Take the lead to restore ethics to our society. Follow the lead of the State of California and the German Corporation, Bayern LB.
Here is Mr. Lockyner's Press Release today on what the major swap dealer banks are doing in credit default swap contracts and the State of California.
Congress, The Derivative Project urges you to ban naked credit default swaps. This is not a short that is helpful to the markets and it is a waste of taxpayers money to regulate them.
April 21, 2010
Why Derivative Sales and all Retirement Accounts Require a Fiduciary Standard
What Do The Derivative End Users Really Need?
Here is Critical Input for the writers of the Financial Reform Bill.
As Senator Blanche Lincoln proposed, any derivative reform bill must include a fiduciary standard between the derivative seller and client.
Here is the latest example of another interest rate swap abuse sale in Snohomish County, (outside Seattle) Washington. This municipality assumed the seller of the interest rate swap was operating in their best interest. A fixed rate is in their best interest, but it was hidden in the fine print Snohomish could never get out of the swap if interest rates dropped. Ironically, Snohomish is suing AIG, which as we all know is 80% owned by taxpayers.
There was no fiduciary standard in the multiple financial arrangements between institutions advising Snohomish County on their bond financing needs. This is the argument that Goldman Sachs is using in its suit by the SEC on fraud. Goldman's position is "these were sophisticated investors, they knew what they were buying."
Unfortunately, our financial system's derivative and equity sales are principally based on an underlying lack of ethics, frequently teetering on fraud. The financial system has evolved from a pillar of the community to snake oil salesmen. There is no choice but to implement the fiduciary standard in all derivative sales and every sale to a retirement account, non-profit or municipality.
The Derivative Project respectfully requests that Senators and Congressmen ensure there is a fiduciary duty for all derivative sales and don't forgot to include stockbrokers that are selling any product to an IRA, must be subject to the fiduciary standard.
It is unconscionable that the writers of this reform caved into the Wall Street lobbyists and took the fiduciary standard out of the current bill, by saying we will study for a year to see if it makes sense. If you continue to offer no protection for the money that Americans save out of their salary for their retirement from the Wall Street vultures, you have indeed shown the most basic corruption of the U.S. political system. You are subjecting the safety of the retirement savings of the average American to the profit needs of the brokerage firms, by not insisting on a fiduciary standard for every retirement account product sale.
What Do the Derivative End Users Really Need?
The House Financial Services Bill and Senator Dodd's Bill have been very lax under the guise to support the needs of the End User, which is also a major income source for the major banks. The end user is any entity that must implement a hedge on an asset to lock in future prices. The end user is why the derivative market exists, farmers hedging future sales of corn, airlines hedging oil needs or small importers locking in their purchases of products in Yen.
The banks are using the End Users as a reason to allow "customized" transactions that will be exempt from clearinghouses and/or regulated exchanges and will continue to trade in the over-the-counter markets. Banks and end users argue that to move these transactions out of the over-the-counter markets will increase their costs.
Here are the facts that Congress must deal with to protect the U.S. Taxpayer going forward:
1.) The over-the-counter markets are dead. This is very, very unfortunate to the End
User, but Congress has no choice but to ban the "old OTC ways." Banks have shown
they have violated every trust and these markets are now obsolete, because they were
based on a "hand-shake." Congress cannot allow the taxpayer to be at risk again.
Every trade must occur on a regulated exchange. There can be no exceptions for
2.) To move forward, tell the end users that it is now fact, there will be no more OTC
It is incumbent on banks and end users to move swiftly to design the exchange traded
market that will allow for the "customized" hedges. It will take creative thought, but of
course it can be done. Further, as history has shown moving trades to a regulated
exchange reduces cost to the end user because of price transparency.
April 20, 2010
The House Financial Services Committee issued a press release this morning with a comparison between their HR Bill and the Republican's stance. Take a look. There are two critical things to note:
The House Financial Services Bill will not stop rogue trading in derivatives and risk to the U.S. taxpayer of another collapse of the financial system.
It is critical one understands how the Republicans have yet to offer anything substantive to prevent the rogue speculation and fraud in the derivatives from happening again. Mr. Will, can you educate the average reader, how to justify the Republican's stance? You appear as one with impeccable morals and ethics.from key economists to Senator Reid, this morning, insisting the proposed derivative financial reform does that go far enough and outlines eight steps to give it what it needs to prevent another financial collapse and bailout.
The Derivative Project supports these eight steps but would add two critical points that must be in any financial reform package:
There must be a fiduciary standard between any swap dealer bank and its client. (and in a similar vein there must be a fiduciary standard between any stockbroker and an individual investor retirement account, non-profit and municipality. This issue should not be the subject of a 18 month study, that is currently proposed.)
Credit default swaps, in particular naked credit default swaps, must be banned.
April 19, 2010
Live Blogging From The Colbert Report
Andrew Ross Sorkin is on The Colbert Report right now. Absolutely nothing was said. Mr. Sorkin was also on CNBC first thing this morning, there was no substance.
In sum, the markets shrugged off the news about Goldman's alleged fraudulent behavior. Goldman ended up 1.63% , today. "It is time to go back to basics and focus on profits. So what if the greed of a few brought down the entire world economy. Goldman is a buying opportunity." What happened to looking at the ethics of management of and what is good for society overall or of thinking about what the implications of fraud are for a leading banking institution?
Let's hope Senator Maria Cantwell, Senator Blanche Lincoln and Elizabeth Warren can bring some sense to Sarah Palin and Congresswomen Michelle Bachman. The fabric of our society depends on it. We salute Simon Johnson, MIT Economist, who has spent significant time with emerging market economies, as head of the IMF. He has a heart, he has a sense of what makes a nation great and has a unique perspective to restore our country to the morals and principles upon which we were founded.
On a short-term tactical basis, Goldman Sachs clearly has little to fear. It has relatively deep pockets and will fight the securities “Fab” allegations tooth and nail; resolving that case, through all the appeals stages, will take many years. Friday’s announcement had a significant negative impact on the market perception of Goldman’s franchise value – partly because what they are accused of doing to unsuspecting customers is so disgusting. But, as a Bank of America analyst (Guy Mozkowski) points out this morning, the dollar amount of this specific allegation is small relative to Goldman’s overall business and – frankly – Goldman’s market position is so strong that most customers feel a lack of plausible alternatives.
The main action, obviously, is in the potential widening of the investigation (good articles in the WSJ today, but behind their paywall). This is likely to include more Goldman deals as well as other major banks, most of which are generally presumed to have engaged in at least roughly parallel activities – although the precise degree of nondisclosure for adverse material information presumably varied. Two congressmen have reasonably already drawn the link to the AIG bailout (how much of that was made necessary by fundamentally fraudulent transactions?), Gordon Brown is piling on (a regulatory sheep trying to squeeze into wolf’s clothing for election day on May 6), and the German government would dearly love to blame the governance problems in its own banks (e.g., IKB) on someone else.
But as the White House surveys the battlefield this morning and considers how best to press home the advantage, one major fact dominates. Any pursuit of Goldman and others through our legal system increases uncertainty and could even cause a political run on the bank – through politicians and class action lawsuits piling on.
And, as no doubt Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world.
George Will is now speaking to Mr. Colbert. Mr. Will is fixated on ensuring limited government. He believes the financial reform will ensure future bailouts, nothing is said about the "fraud" perpetuated by financial institutions. Again nothing was said. It is back to The Daily Show for substance.
We assume this lack of substance on The Colbert Report does not predict what will happen in Congress this week with financial reform legislation.
April 18, 2010
CNBC and Wall Street Equity Analysts Are Contributors to Ongoing Instability in U.S. Financial Markets
Within five minutes, after the SEC released the news of their charges of fraud against Goldman, CNBC had calculated the potential losses to Goldman's balance sheet, about a billion dollars. CNBC analysts predicted Goldman's balance sheet could well support this charge. With a 13% drop in Goldman's stock, Goldman looked like a buy according to CNBC reporters.
Further, Bloomberg quotes Oppenheimer's and Sanford Bernstein's equity analysts, outlining the likely impact to Goldman's per share costs and the impact of tighter regulatory scrutiny. These equity analysts think Goldman is still a Buy. This attitude and lack of understanding of the critical role of the financial markets underscores the reasons for the size of the financial crisis. Lack of ethics or understanding of the role of financial markets on the part of equity analysts and the lack of journalists' investigative reporting were a major factor in the size of the financial crisis.
The role of financial markets is to provide liquidity for investors and capital for investment.
The Derivative Project's "Simple Story" in Blog entry February 28 explains the historical role of equity analysts and journalists, back in the 1980's when the over-the-counter markets functioned successfully based on trust between commercial banks, when rogue speculation was cause to sell a stock, as it was not in the community's best interest.
Equity Analysts understood the role of financial markets and kept Wall Street accountable for their rogue speculation that only served to undermine the society as a whole. The New York Times missed an opportunity in 2007 and 2008 by not having have key business editors, doing critical investigation and speaking loudly about the role of financial markets, prior to the collapse.
The equity analysts and the journalists use to keep the rogue behavior of corporations contained through public shame and flogging. Here is how it use to work, taken from "The Simple Story" :
Minneapolis Star Tribune – October 1988
“FBS set off a small bomb in the financial community when it revealed its $8 billion portfolio of U. S. Treasury bonds and other securities was $640 million in the red.
“A number of Wall Street’s most prestigious firms have turned against the bank, some with a vengeance. For example, in a burst of gunfire rare in thenormally placid Wall Street commentary, Thomas Hanley of Salomon Brothers wrote:
“… We are disturbed by the company’s inability or unwillingness to adequately manage the credit and interest rate risks inherent in the banking industry…Because management has clearly demonstrated that it is immune to the creation of shareholder value, we believe that investors should dispose of their current positions in First Bank System.”
“Some people wonder whether First Bank is in the business of making loans or managing a leveraged bond portfolio,” “It raises the question of what’s best for the community.”
Ironically, Richard Davis, CEO of U.S. Bank, is now head of the financial services industry's Financial Services Roundtable. (http://www.fsround.org/about/executive.htm) It was Mr. Davis, one of the 13 Bankers that met with President Obama, last Spring, that spoke to reporters and represented the White House after the meeting with the President. U.S. Bank was shamed by Wall Street's equity analysts and by journalists for their rogue speculation in interest rates. U.S. Bank learned their lesson.
U.S. Bank would not be shamed twice in the public's eye. It learned to put in the controls to manage rogue speculation at any level and to conduct business in regard to what was best for society as a whole. If one has met Mr. Davis, it is clear he represents a leader that has shown his heart and actions thinks about society as a whole. While The Derivative Project does not agree with every view of Mr. Davis in his role as head of the Financial Services Roundtable (at this time when the major banks are actively lobbying Congress on derivatives reform), he is a leader and has the capacity to move the 13 Bankers to do what is best for society in terms of the pending financial reform in derivatives.
Because Goldman's management has clearly demonstrated that it is immune to the creation of shareholder value, The Derivative Project believes that investors should dispose of their current positions in Goldman Sachs. Goldman's behavior raises the question of what's best for the community.
April 17, 2010
Congress, Are you Convinced Yet? The Over the Counter Markets Are Dead.
The SEC has taken action against Goldman on their ABACUS CDO, with hand-picked, toxic securities, that were then sold to investors.
Another fraudulent misrepresentation, not highlighted in this probe to date, is the fraud that occurred in the over-the-counter markets between AIG and Goldman, that enabled Mr. Paulson's ability to short the Abacus securities.
Goldman arranged for AIG to write credit default swap contracts to Mr. Paulson on the ABACUS synthetic CDO securities. Mr. Paulson paid AIG a premium to enter into these credit default swap contracts. Through these financial contracts, credit default swap contracts, if the ABACUS synthetic CDO securities failed, AIG would pay Mr. Paulson. It was not "insurance". These were financial contracts, whereby both parties are representing they had the capacity to enter into the contract.
Government emails released have shown that Goldman Sachs, early in 2007, prior to the creation of the ABACUS CDO, showed Goldman had concerns about the financial capabilities of AIG meeting its financial obligations under its excessive counter party credit risk resulting from their credit default swap positions.
AIG's 2007 Annual Report is also abundantly clear they had over-extended on their issuance of credit default swap contracts. Under most economic scenarios, they did not have the financial capacity to make good on these contracts. This is fraud and misrepresentation.
Therefore, both AIG and Goldman are guilty of fraudulent misrepresentation to Mr. Paulson's hedge fund and to its shareholders, by entering into financial contracts where they represented that they had the capacity to back up these contracts. Goldman clearly knew at the time ABACUS was created that AIG did not have the capacity to back up these credit default swap contracts. Quite simply, if The Derivative Project saw this risk with AIG and contacted journalists and Congressmen about this ticking time bomb,(see the "Simple Story" under The Derivative Project's April 15 blog entry) one can be sure AIG and Goldman were well aware of the fraud they were committing by entering into these contracts with Mr. Paulson's hedge fund.
Here is a repeat of The Derivative Project's April 6 blog on fraudulent misrepresentation for Congress to understand why it is so hard for the average American to understand why what AIG and Goldman did with their credit default swap contracts for Mr. Paulson's "speculative" bets on the failure of ABACUS is not fraud:
Misrepresenting that one has the capacity to enter into a financial contract, to honor that contract, when one does not have the capacity to honer that contract, is fraud. Here is a very simple example:
I represent to my bank that I have the capacity to repay a $500,000 mortgage. I really do not have that capacity. That is, by definition, a federal crime. It is a fraud. The bank will prosecute me for this misrepresentation. Here is how the average American is warned about declaring proper capacity on a mortgage application:
"One thing that any mortgage shopper should be on the lookout for is mortgage fraud - intentionally trying to deceive a bank or lender who is extending or offering a mortgage loan to a consumer in order to positively affect the loan terms. You might think it is no big deal to fudge a little bit here and there about your income, your job, your credit status or something else on your loan and it is no big deal, but it is a big deal. It is a federal crime to knowingly falsify any information on a loan application, and if your are caught doing it the penalties can be very severe, ranging from the mortgage lender demanding full payment of the loan immediately, massive fines, and possibly even the FBI showing up at your home one day and taking you off to prison. Some of the most common types of mortgage fraud include kickbacks, silent second mortgages, and falsifying employment and/or income."
In sum, the major swap dealer banks were well aware of counter party credit risk in the OTC markets. They violated the trust and the handshake that have been the corner stones of the OTC markets. They were responsible for self-policing the credit worthiness of each counter party. Counter parties had a SEC disclosure responsibility in their Annual Report to disclose if they had the capacity to enter into these financial contracts and make good on them.
The trust is gone. These markets no longer exist. Ask any American if they believe the major swap dealer banks should be given a second chance to continue trades in an over-the-counter market.
Next Steps for Congress Now that the Over-the-Counters Are Dead
Senator Lincoln's proposal understands these markets are no longer viable. Senator Dodd and Senator Lincoln should work out a proposal for all derivatives to move to a regulated exchange and/or be substituted by an exchange traded fund if the demands on clearinghouses are too great initially.
This legislation should make special exemptions for end users principal hedging needs that do require, for example, very customized foreign exchange forward contracts. The spot and forward foreign exchange markets would be the only exception. Viable commercial banks, not investment banks or hedge funds, could continue to execute spot, forward and swaps, on behalf of end users and between themselves. It sum, foreign exchange OTC contracts would return to the days when commercial banks acted like commercial banks. To minimize the costs to the end users, commercial banks would be given a second chance to operate an OTC market in foreign currencies. However, the appropriate regulatory authority, would be reviewing these OTC trades and they would no longer be off-balance sheet.
The Derivative Project agrees with Senator McConnell. Senator Dodd's bill should not include a fund for future bailouts. As 13 Bankersargues. as Mr. Kwak and Mr. Johnson argue, the 13 largest banks must be broken up. This will end the need for a bailout fund.
The financial system cannot survive without a basis of trust. Additional regulation cannot prevent fraud and deceit. Congress must send a message and President Obama must lead. The United States will no longer accept the ways of Wall Street. Fraud and misrepresentation are not acceptable by Goldman Sachs or by any stock broker. Every American is entitled to a retirement account that receives investment advice that is subject to a fiduciary standard. Every municipality and non-profit is entitled to hedging advice with derivatives or interest rate swaps that is subject to a fiduciary standard. Any financial product sold to a non-profit, retirement account or government entity is now subject to a fiduciary standard. American's will not tolerate Washington and Wall Street taking a year to research if a fiduciary standard is warranted. The trust is gone. Non-profits, municipalities, American's retirement savings will be protected in the reform bill that is now pending. And yes, Senator McConnell, Sarah Palin, Michelle Bachman, if you don't stand up and support this, you are un-American.
Let's structure the financial markets so we can believe once again in the ethics and honesty of those we must do business with. That means smaller entities where the CEO really knows what is going on and can no longer declare to Congress, "I just did not know this was going on." Any regulation that does not accomplish this will fall short.
C'est Domage, Saint-Etienne: It is Time to Revisit Berle's Vision
Bloomberg reports this morningthe latest victim of inappropriate swap sales. Yes, mais oui, the standard swap dealers' response and the courts in Germany say it is buyer beware. These banks did nothing illegal.
This is another tragic example of why it is critical the U.S. Congress pass Senator Lincoln's bill that insists there be a fiduciary standard between a swap dealer bank and its client.
The situation in Saint-Etienne is tragic. They relied on the "expertise" of the bankers that insisted the financial arrangements were in their best interests. We all know municipalities, banks and corporations role is not to speculate. To structure a deal for a municipality that depends on movement of currencies and interest rates is irresponsible. No, it is not illegal, but it is irresponsible and unethical.
Speculating is fine for proprietary traders and for hedge funds, and individuals that choose to do so, not for commercial banks.
It is time the debate moved away from determining ways for these banks to continue these reprehensible behaviors. Senator McConnell, take a stand. Is this what the Republicans represent, greed, unethical behavior and slight of hand. Senator McConnell, Michelle Bachman, Sarah Palin take a stand if you have any sense of right, wrong and any moral backbone. How do you recommend we change this aberrant behavior that is destroying the fabric of our society? You are the party of "morals and family."
Senator Lincoln,an Arkansas Democrat, as headof theSenate Agriculture Committee, has taken a bold step, a critical step. The American people need more Senators like Senator Lincoln. Senator Lincoln has read and studied the issue and knows Congress must take a bold step for sweeping, fundamental reform in derivatives. Americans have been waiting for almost two years for more Senators to step forward and to really study and address the underlying causes of the financial crisis and to propose basic, meaningful reform.
The issues that Senator Lincoln is addressing run to the core of our democracy and the values we represent. This is a bipartisan issue. It is time the Republicans and Democrats that are fighting this most critical reform, stand up and debate what is at stake. The derivatives reform is not about the major banks losing billions in revenues, that will harm our GDP. This reform is about what has made our nation great. This reform is about where we want to invest our tax dollars. Do we want to babysit major derivative banks swap speculation trades or do we want to invest in technology and education for the long-term.
Senator Lincoln's proposal should be swiftly accepted by the left and the right. To not do so violates the premise on which our capitalist system was founded.
Here is the link to this morning's Washington Post article, concerning Senator Lincoln's proposal.
Senator Lincoln is working to "reverse the tide that has caused significant job loss..." This is an elementary start as without this legislation, we will continue to invest in monitoring bank derivative trades and not the job creation we need to restore our economy.
Here are the highlights of what Senator Lincoln is proposing:
1. Senator Lincoln is proposing a fiduciary standard with a swap dealer bank and its client.
This is fundamental and it is an embarrassment to the American People, that we have to insist that a major bank act as a fiduciary. As The Derivative Project has pointed out in its post on February 27, 2010: "Here is the Simple Story, It is All the Financial Inquiry Commission Needs" there was a time when commercial banks did what was best for the community. Banks were shunned if they did not. Executives were shamed by journalists if they did not do what was best for their community. We now have our most "liberal" newspaper, The New York Times' Business Editor, Andrew Ross Sorkin, publicly mocking its business columnist, Gretchen Morgenson, on CNBC, when she reports the facts of what happened on AIG and Goldman Sach credit default swap trades.
Senator Lincoln knows we now must regulate these banks to act as a fiduciary. It is deplorable what has become of our financial systemand the ethics of their executives.
Read the post below about Milan, Italy suing our major derivative banks. The U.S. courts allows these swaps trades and the AIG fraud, because these entities skirt the meaning of the law, it is all unethical, but "legal." This lawsuit is an embarassment to the American people. What happened to the concept of fiduciary and why do we have to legislate it?
2. Senator Lincoln is proposing that the swap dealer banks should no longer have access to the underlying structures given to commercial banks
This is fundamental. Senator Lincoln's proposal would ban swap dealers from using the Federal Reserve discount window, emergency liquidity functions and FDIC deposit guarantees. Since major swap banks have not acted as fiduciaries, since major swap banks abused their positions and obligation to the community, through blatant unchecked speculation in derivatives with taxpayer funds, they will no longer be entitled to these amenities that are reserved for those banks that serve as the foundation of our financial system.
Senator Lincoln's unnamed aide stated, "The measure aims to ensure banks don't endanger depositors with risky trading of over-the-counter derivatives."
Most predictably, Senator Judd Gregg (R-NH), a key member of the banking committee, said in an interview Wednesday, "that the derivative rules Senator Lincoln plans to propose would make U.S. markets uncompetitive in the U.S. economy. 'You might as well say take every derivative trade to Singapore.'
Senator Gregg, The Derivative Project has heard from many, many Americans, both on the left and the right. Derivatives all moving outside the United States (except for those necessary for end user hedges as Senator Lincoln's bill allows) is exactly what the average American wants. This bill accomplishes that.
April 12, 2010
Today is the Deadline for Major Banks to Disclose Their Credit Default Swap Positions to California's Treasurer
As The Derivative Project reported below on March 31, the California Treasurer set April 12 as the deadline for reporting their Credit Default Swap positions. We will keep you posted.
However, there is one significant event since March 31. We know now that our own Federal Reserve is the owner of credit default swaps positions, betting that the State of California will go belly-up. NPR did the digging into Maiden Lane, which was the special purpose vehicle that the Federal Reserve set-up to house the "toxic stuff" that J.P. Morgan did not want when they took over Bear Stearns in March, 2008.
Here is the link to NPR's April 9th story on what toxic stuff is in Maiden Lane. http://www.npr.org/templates/story/story.php?storyId=125764118
Bloomberg News was responsible for ensuring the Federal Reserve would open their books as to what the U.S. taxpayer actual owned in Maiden Lane. It was a "secret" until Bloomberg pushed for this disclosure under the Freedom of Information Act. We now know why the Fed wanted to keep the secret.
The Derivative Project urges more municipalities and corporations to continue the push for disclosure by the major banks (who do 96 percent of all credit default swaps).
Progress is being made. Without the average American becoming invested in what one would call an obscure financial tool, we cannot bring about the change that is critical to return to GDP growth that moves credit default swaps and other derivatives that are not used for proper hedges, away from a key component of GDP.
We want out commercial banks to focus on lending in technology, infrastructure and entrepreneurial small businesses. The time has come to move away from the easy money that distorts financial markets and now requires millions of dollars of taxpayer dollars to support regulatory systems to monitor these side bets.
April 7, 2010
Live Blogging from the FCIC Hearing -
---- Mr. Greenspan said What AIG did was legal..."they were just writing insurance and they did not have any capital requirements to limit what they were doing "
Brooksley Born asked Mr. Greenspan if credit default swaps contributed to the financial crisis and the $180 billion U.S. taxpayer bailout. Mr. Greenspan explained "credit default swaps" are different than interest rate swaps and foreign currency swaps.
Mr. Greenspan said this was different, "AIG was writing insurance" and did not have the same capital requirements. This is shocking. Is this how the major credit default swap dealer banks are justifying the financial collapse and need for $180 billion in taxpayer dollars, without holding any corporation or executive responsible for this fraud?
AIG entered into financial contracts in an OTC derivative market that had requirements that a counter party would have sufficient capital to enter into these financial requirements. They were not just "writing insurance."
Here is a link to The Derivative Project's comment on this "scam" to protect AIG and other counter parties at the Financial Times website and live blog during the FCIC investigation.
April 7, 2010
Is it Fraud if You Misrepresent Your Corporation's Capacity to Meet Credit Default Swap Contract Obligations? Bloomberg News reports this morningFederal Prosecutors will continue their questioning of the AIG executive responsible for entering into credit default swap contracts far in excess of AIG's means to ever meet the contractual obligations under these contracts.
To quote from Bloomberg News, "Daniel Richman, a Columbia Law Professor in New York and former Federal Prosecutor, said Cassano's statements to investigators will "focus on a claim that he made full disclosure and lacked any criminal intent."
"This would be his opportunity to explain that while he made some regrettable judgments, he committed no crimes, Richman said." "By speaking to the government and putting himself at some risk, he is communicating some confidence that prosecutors will accept his story."
It is common sense. There is no way AIG could have ever supported their contractual obligations under their credit default swap obligations if there were changes in market conditions. Of course they knew that. This is misrepresentation, pure and simple.
How can one ever argue there was not criminal intent? Billions of dollars at profits were at stake. We don't believe the average American will ever accept the "stupidity" and lack of judgment defense.
Here is why:
A single women, who had two young children, desperately needed funds for health care expenses for her youngest child. She misrepresented her income to get a larger second mortgage, using the proceeds for medical expenses. She had no criminal intent. The money was going to save her young child and she would pay it back later. The bank prosecuted this single women, took her home and she is now living in a shelter.
This women told the bank she didn't think she did anything wrong. She thought it would be ok to do this for just a short period of time. The bank began proceedings to prosecute this young mother for fraud and misrepresentation.
April 6, 2010
Is it Fraud if You Lie About Your Capacity to Meet Mortgage Debt?
The Derivative Project has sent an inquiry to the U. S. Department of Justice to better understand why they do not consider AIG's credit default swap financial contracts fraudulent contracts.
Remember, credit default swap contracts are financial contracts, not insurance. One cannot enter into a financial contract knowing they do not have the capacity to fulfill the requirements of that contract.
As you are aware, you cannot misrepresent your income to a bank to get a larger mortgage. That is fraud and is a federal offense.
Here is the letter to the U. S. Department of Justice:
April 6, 2010
U. S. Department of Justice
950 Pennsylvania Avenue N.W.
Washington D. C.
Dear Department of Justice:
AIG's credit default swaps were not "insurance" as commonly referred to. AIG credit default swaps were financial contracts. AIG represented that they had the ability to fulfill each and every financial contract (credit default swap) that they entered into. They did not have the capacity to meet the requirements of these contracts. That is fraud.
We read with interest in the Wall Street Journal article yesterday that there may be no criminal charges against AIG Executives on their undeniably fraudulent credit default swap contracts.
Misrepresenting that one has the capacity to enter into a financial contract, to honor that contract, when one does not have the capacity to honer that contract, is fraud. Here is a very simple example:
I represent to my bank that I have the capacity to repay a $500,000 mortgage. I really do not have that capacity. That is, by definition, a federal crime. It is a fraud. The bank will prosecute me for this misrepresentation.
"One thing that any mortgage shopper should be on the lookout for is mortgage fraud - intentionally trying to deceive a bank or lender who is extending or offering a mortgage loan to a consumer in order to positively affect the loan terms. You might think it is no big deal to fudge a little bit here and there about your income, your job, your credit status or something else on your loan and it is no big deal, but it is a big deal. It is a federal crime to knowingly falsify any information on a loan application, and if your are caught doing it the penalties can be very severe, ranging from the mortgage lender demanding full payment of the loan immediately, massive fines, and possibly even the FBI showing up at your home one day and taking you off to prison. Some of the most common types of mortgage fraud include kickbacks, silent second mortgages, and falsifying employment and/or income."
We would like to speak with the appropriate Justice Department attorney as soon as possible, so that we may understand why AIG will not be prosecuted for fraud on these credit default swap contracts.
The Derivative Project
The response will follow as soon as we hear from the U. S. Department of Justice.
April 5, 2010
Euroland Prosecutes Those That Misuse Their Fiduciary Duty - The U.S. Judiciary Seems to Condone These Wall Street Actions That Undermine the Future of Our Society
The Derivative Project returned from Euroland this morning; have we really abandoned the values they still hold dear across the Atlantic? We learned this morning in the Wall Street Journal that it appears our Judiciary is not going to file any criminal charges against the executives of AIG for their fraud with unlimited counter-party credit risk with credit default swaps. Here is the link to this morning's WSJ story.
This is unconscionable. Counter-party credit risk is an elementary credit extension. AIG extended unlimited credit, without resources to back up these credit extensions in the form of credit default swaps. How is this not fraud?
The American taxpayer bailed out AIG, Goldman, Societe Generale and others that did these imprudent, fraudulent credit default swap contracts with AIG. These firms knew full well AIG did not have the capacity to honor these contracts as revealed in AIG's 2007 Annual Report and as predicted by Martin Feldstein AIG's Board Member and Harvard Professor. The facts are clear.
Euroland represents a society that still upholds fundamental values. The Milan Courts will not tolerate "fraud" that U.S. Banks and AIG say is "legal".
March 31, 2010
California Cares - Progress is Being Made on Targeting Large Bank CDS Positions
In the United States, change often begins on the West Coast and moves East. Can parallels be drawn between California's high debt load and the debt load of Greece?
Unlike the Greeks, California is taking a preemptive position and requiring the major banks to disclose their CDS positions related to California government obligation (GO)bonds. The deadline for this disclosure is April 12.
The links to California State Treasurer's letters to 6 major credit default swap dealer banks is at the home page of Bill Lockyer, the California State Treasurer: www.treasurer.ca.gov/cds/index.asp.
The Derivative Project is pleased to report the first action of a municipality taking personal responsibility to stem unethical behaviors in derivative trading. Please refer to the Updates on The Project tab for more detail in the coming weeks of individual entities taking charge to bring about the needed changes in our financial system.
March 18, 2010
The Milan Courts Have Changed the Game
The Derivative Project apologizes for the limited blog posts. We are on assignment in Euroland until April 6, so postings will be limited.
The most critical action taken here in Euroland occurred this week by the Italian Courts.
The Milan courts have charged three major banks, including J.P.Morgan, on fraud in several interest rate swap transactions.
Here is why this is a key first step. It serves to bring pressure on U.S. Congress and bring to the American people an understanding of the "fraud" that has occurred in the financial crisis. The "borderline" legal actions of the blatant misuse of derivatives is now in a European court system that is eager and perhaps without the normal conflicts of interest we have in the United States, to state the obvious and move forward with precedent setting legal action.
The United States has remained silent as the lobbyists are so strong and those "average Americans" are without a financial background and are hesitant to question, because they do not know where to begin. Overall the American public has not been informed in the main stream press, including limited reporting by Andrew Ross Sorkin of the New York Times of the true fraud that has been perpetuated with AIG as a start. Gretchen Morgenson put forth a straight forward example of the AIG/Goldman fraud in a straight forward article, that Mr. Sorkin disagreed with and distanced himself from on CNBC.
This is a key beginning with the Italian courts taking the lead. More credible mainstream press will follow and Euroland will take the lead in straightening out Congress and our Executive Branch on the true causes of the global financial crisis.
March 11, 2010
Senator Dodd and Secretary Geithner Must Stop Unwarranted Reckless and Irresponsible Use of Derivatives by U.S. Financial Institutions
How much shame in the global marketplace must the U.S. taxpayer have as a result of this reckless behavior before the U.S. government stops these irresponsible actions?
The E.U. is calling for more transparency and responsible use of derivatives by the U.S. Geithner is saying no.
The E. U. wants an end to derivative speculation. The Derivative Project seeks an end to unwarranted, reckless use of derivatives.
Here are the arguments for banning credit default swaps:
Credit default swaps distort the basics of finance. Interest rates reflect an entity's level of risk. What is an entity's actual level of risk based on the required premium over the "risk free rate" ?
Credit default swaps do more harm by providing speculative bubbles in the interest rate markets.
Credit default swaps make one lazy. They provide a false sense of security, and no one is looking at the basic fundamentals. They provide a tool for distorting market size and systemic risk, like the case of the synthetic CDO's that the U.S. taxpayer is now funding as a result of the AIG bailout.
U. S. financial institutions have shown tight regulations are the only way to eliminate this behavior.
March 10, 2010
Here is Real Discussion - But It Still Has Some Idle Threats In It The Wall Street Journalreports today that the EU is seriously considering some restrictions on credit default swap speculation. The EU and U.S. Congress are not going far enough. Buried in the article is the International Swap Dealers Association's idle threats to keep this rogue swap instrument alive.
Those interested in keep credit default swaps alive argue that elimination would push up borrowing costs for sovereign entities and corporations. They argue that would thus further destabilize the financial system. We all know this is not true. True borrowing costs are determined by the analyst and through knowledge of a host of economic conditions from country risk to currency risk, in addition to the underlying credit fundamentals. We all know the financial markets operated more smoothly without credit default swaps.
If Congress does not ban credit default swaps, the increased costs will once again be shifted to the U.S. taxpayer who will have to spend millions of dollars to establish the systems to monitor these contracts, because we all have learned, major financial institutions no longer have a code of ethics and ability to operate with a hand-shake in an over-the-counter market. .
Elimination of credit default swaps will return us to a more normal market where "credit" is not subject to rogue speculation by traders. All the major banks know how outraguous the concept is that "traders" who did not even look at a financial statement or a country's balance of payments are impacting a country's "credit". A total ban of credit default swaps is the only option.
It is time U.S. Congress and the Obama Administration held firm and banned credit default swaps in support of the U.S. taxpayer. Of course there is pressure from lobbyists of the ISDA and the major profit centers that trade in these instruments. However, regulation of misuse of derivatives is critical to restoring American's faith in Congress, that there will be an action that will move us closer to restoring an economic foundation that represents growth in real industry, not profits from rogue speculation in products that de-stablize the world financial order. Ban of credit default swaps is critical to restore stability to the global financial system.
Mr. Papandreou of Greece agrees with us at The Derivative Project, misuse and lack of transparency in any derivative, from excessive currency shorting to credit default swaps to excessive bets on oil and grains on regulated exchanges have de-stablized our capitalist system one to many times.
"...They knew what makes nations great and what pulled them down into ruins. And they knew that above all else, how we treat ourselves, as individuals, customers, neighbors, traders and fellow citizens, matters more than just making a living."
March 8, 2010
Mea Culpa, But Let's Move to Real Discussion
I read the critiques too quickly. Gretchen Morgenson did say "like credit default swaps" when she clearly should have said currency swaps. My guess is she does know the difference as does the NY Times. Errors happen.
However, the New York Times is the only mainstream press that is attempting to give the average American an understanding of critical legislation to retain the positives of derivatives in a controlled environment that never again taps the U.S. taxpayer for bailout funds on collateral calls and a ban on new complex systems to prevent systemic risk of counter party failure.
Consensus is building from the response The Derivative Project has seen, that U.S. taxpayers will not fund the complex systems required to monitor these trillions of customized OTC contracts, off regulated exchanges.
Time would be better spend on substantive discussion on the critical legislative changes, since the six major derivative banks have blown their trust, which was the foundation upon which the OTC derivative markets were developed. Without that foundation of trust, there are no over-the-counter markets.
The current Derivative Bill passed by the House allows for some custom derivative transactions to benefit the "End User" corporation. The Derivative Project is insisting these contracts will not be allowed. Trust is broken and the expenses are too great for the American taxpayer to monitor these contracts.
Therefore, time is better spent by the "blogosphere" on focusing on what are the positives of a new world where foreign currency spot, forward and currency swap contracts will trade in a regulated environment, where CDS are banned and interest rate swaps trade on a regulated exchange, with no exception, as opposed to berating reporters who are trying to involve the American public in a discussion that is critical to our economy going forward.
By the average American having bailed out key derivative players on their collateral calls (i.e. AIG, Goldman, Societe Generale, etc.) they have a keen interest in this legislation. Whether it is a currency swap, a credit default swap or an interest rate swap the issues are now front and center for the American taxpayer. It is on their nickel and their children's nickel...this rogue speculation will never occur, including the proposed staggering costs to monitor over-the-counter custom swaps. As far as the American taxpayer is concerned there are far more efficient investments with much greater long-term returns to our GDP.
Let's hope the mainstream press will get more discussion going, like Ms. Morgenson's and the blogosphere will focus on positive steps to move to the new world of banned credit default swaps and exchange-traded derivatives.
March 7, 2010
Jumping to Conclusions - Critics Pound Fast, But Miss? Gretchen Morgenson's NY Times Swap Article Today
Gretchen Morgenson wrote today of the additional costs interest rate swaps have caused many U.S. municipalities. This is a very fair assessment of how interest rate swaps can be misused. They are a valuable interest rate hedge if used in the proper context, by counter-parties that are well versed in their intricacies, which sometimes a certain municipality might not be. It appears from Ms. Morgenson's article, sometimes the entities that structured these interest rate swaps did so in a manner that was sub-optimal. This is not a good thing, as it adds a layer of unnecessary costs to the taxpayer.
Gretchen Morgenson in her article today did not say the municipalities used credit default swaps as Seeking Alpha stated. Ms. Morgenson stated "like credit default swaps.." meaning, these interest rate swaps were comparable to credit default swaps in the fact that they caused more harm than good. Ms. Morgenson did not state the municipalities used credit default swaps.
Ms. Morgenson's point is a valid one that needs to be examined prior to the Senate Banking Committee votes on the necessary regulation of derivatives.
Bullying by industry and "pro-derivative income blogs" does not help. The American people need straight forward explanations of the pros and cons of over-the-counter derivatives and a detailed cost-benefit analysis of their continued use in over the counter markets. As The Derivative Project has pointed out the costs to monitor these contracts to the American taxpayer are staggering.
Reuters reported this morning that a top domestic Treasury Nominee, Jeffrey Goldstein, said dollar swaps should stay off regulated exchanges. Of course they should. The foreign exchange spot and forward interbank markets have been crucial to end users and an important profit center for certain financial institutions. What he doesn't understand is these markets no longer exist. These were interbank markets established by financial institutions based on trust. Once the trust has been violated, there is no going back. The markets are dead.
The American taxpayer will not put another dollar into the regulatory costs to monitor the interbank markets or any derivative in the OTC markets. The game is over. With our precarious economy and high unemployment we have much better things to spend our money on to rebuild an economy that will be strong and vibrant for our children. Monitoring derivatives in over-the-counter markets is not part of our long-range plan. In short, a few financial institutions destroyed these valuable, most critical markets due to their short term greed.
Today we explore why the Over-the-Counter Derivative Markets are History
The International Swaps Dealer Association is making a Hail Mary pass by hiring Damon Munchus who has been working for Treasury Secretary Geithner. One asks the question, isn't there a ban on working for the Administration, then lobbying? Yes, there is a ban against lobbying the Administration, but not Congress.
So Mr. Munchus leaves the Obama Administration at the most critical time and leaves behind the efforts of the House Financial Services Committee and the House Agriculture Committee as their October approved bill on Derivatives Transparency is just about to get its hearing in the Senate.
This is a sign. Industry is desperate. Just why are the over-the-counter markets history? These markets began in an era when major commercial banks created a tight-knit over-the-counter markets based on a hand shake. The trust has been broken. Goldman Sachs violated the basic tenets of fair trade, by entering into their contracts with AIG. J.P.Morgan violated the trust of these markets by not calling the whistle on the unlimited counter-party credit risk exposures at AIG.
Of course J.P. Morgan and Goldman knew what excessive counter party credit risk was. It was disclosed in AIG's 2007 Annual Report. The major banks, the major players in the Over-the-Counter Derivative markets breached the trust between each other and breached their duty to the American people to uphold principles of trust and fair trade at our major financial institutions. The American people cannot afford to give these institutions a second chance. The trust is gone. The over-the-counter markets are dead.
These major financial institutions have destroyed the flexibility of customization of the foreign exchange spot and forward markets. These markets were a critical tool for end users, from small importers to trading giants, like Cargill. These contracts, due to the greed and lack of ethics of the major derivative traders must now move onto regulated exchanges. The average American cannot be saddled with the costs of monitoring the systemic risks of the major derivative traders side bets in the OTC markets. The American people will no longer be shamed by the unethical, but legal, currency swap agreements with Sovereign entities, such as Greece, that undermine the European Union. The OTC markets are dead.
We salute Congressman Peterson and Congressman Frank for moving to require more disclosure on credit default swaps. However, the American people have moved well ahead of you. Credit default swaps will be banned and all derivatives will trade on regulated exchanges, with no exceptions.
We are making progress. Other voices are calling for a ban on naked credit default swaps. The link below to today's Financial Times is arguing that a credit default swap can only be used to hedge an actual bond and it serves as an actual hedge. This is a start, but a total ban is critical.
As The Derivative Project points out credit default swaps are not by definition a derivative. They encourage unethical business practices and are costly to the American Taxpayer to set-up the systems to monitor trillions of contracts that do not add substantive value to our economy. Please visit the Objectives Tab for the rationale for the total ban.
The Huffington Post reported today, a U.S. Treasury official just left the Obama Administration to lobby for The Cypress Group who represents the International Swaps Dealers Association, the main lobbying arm to keep the status quo in credit default swaps.
Please take action at the Email Tab today and Resolution Tab today. A unified voice is needed to effect the changes that are essential to the future of our economy.
Your voice has never been more critical.
February 28, 2010
The New York Times Gretchen Morgenson has an excellent article this morning on Congress' inaction on regulating derivatives and the dangers of credit default swaps. However the proposed changes by Mr. Mayer of the Brookings Institution do not go far enough. Credit default swaps must be banned. Our budget deficits and trade deficits have too many demands, and our unemployed need jobs. U.S. taxpayer funds should not be used to develop complex regulatory systems to baby sit the side bets of five major Wall Street banks.
February 27, 2010 - Live Blogging to FCIC Public Hearing
The Financial Crisis Inquiry Commission (FCIC) is currently meeting. The panel has agreed the major cause of the crisis was lack of risk management at major financial institutions. They state maybe risk management just hasn't kept pace with all the changes over the years. That is false. The risk management has kept paced. It was a fundamental credit risk extension that was overlooked, nothing more, nothing less. The risk was unchecked counter party credit risk.
The Inquiry Commission wants to take a look at the institutions that successfully managed these risks to understand what went wrong at the other institutions. Read the story below and you will have your answer.
A simple explanation is warranted, because the cause of the crisis was very simple. Major institutions ignored simple fundamentals of credit risk. It is time for the Commission to focus on what really happened, fraud on the part of certain institutions by entering into credit default contracts that they could not support from a credit extension basis. In addition, the exacerbation of the collapse of certain entities by accelerating collateral payments under these fraudulent contracts, because they would not be valid in bankruptcy is the fundamental issue. These fraudulent contracts could have been unwound in a systematic fashion, as opposed to the "crisis" created by the TARP, and a three page document from Secretary Paulson is where the investigation must begin. This was the cause of the crisis.
The academic community missed it and failed to warn Congress. Major endowments missed the collapse. A few of us saw it and protected our retirement. Please listen now to alternative voices.
Professor Geankopolus of Yale University testified before the Financial Crisis Inquiry Commission today. He stated:
"Traders who never before had to give a second thought to these counterparty risk questions suddenly had to reevaluate all these contracts with disastrous effects on liquidity and price discovery."
This is categorically a false statement. From whom did Professor Geankopolus receive this information? If he is testifying before a congressional committee would he not be familiar with the basics of commercial banking credit risk extensions and leverage constraints?
Commercial banks and their proprietary traders have managed counterparty credit risk since the inception of the OTC derivative markets. This is a critical fact that must be understood by the FCIC. "Traders who never before had to give a second thought to these counterparty risks.." Is Professor Geankopolus trying to give these banks an excuse for this fraud?
AIG's 2007 Annual Report laid out all the losses in their credit default swap portfolio and the potential for collapse of the underlying assets for these credit default swaps was presented by Martin Feldstein, Harvard Economist, and AIG Board Member at Jackson Hole in September 2007. It was evident at that point the counterparty credit risk was unmanaged.
Why didn't Mr. Feldstein, Secretary Paulson, and Mr. Bernake work together for unwinding these contracts in an orderly fashion. Under U.S. law, if a contract is entered into under fraudulent terms, of course in can be unwound. Any reputable banker that has ever managed counterparty credit risk will tell you it was fraud. These are the issues FCIC should be investigating.
The American public needs straightforward answers in this investigation. We hope Mr. Geankopolus will soon reveal to us the source for this statement.
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